Investors sitting on a cash pile with Motorola options

New York/Chicago: Some lucky players hit the jackpot by placing bullish option bets on Motorola Mobility ahead of Google’s takeover announcement.

Google on Monday said it will pay around $12.5 billion for Motorola Mobility Holdings, or $40 per share, a 63 percent premium to Motorola’s Friday closing price. Trading in Motorola Mobility options spiked on Wednesday, with nearly five times the usual number of contracts traded daily.

[caption id=“attachment_61374” align=“alignleft” width=“380” caption=“Although the select option trades were unusual, they were not necessarily indicative of insider trading because they could reflect speculative merger bets. Reuters”]  [/caption]

“Investors who recently bought calls hit a home run on the Google bid,” said William Lefkowitz, options strategist at New York brokerage firm vFinance Investments. “It appears that many are selling calls on Monday to lock in profits as they are not anticipating a higher offer and as shares rise,” he said.

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Although the select option trades were unusual, they were not necessarily indicative of insider trading because they could reflect speculative merger bets. But the action prompted at least one participant to question whether word of a deal had reached some investors before it was formally announced.

Motorola Mobility options typically trade about 12,000 contracts per day, according to options analytics firm Trade Alert.

But last Wednesday, activity spiked to 4.8 times the average daily level with about 46,000 calls and 10,000 puts traded, Trade Alert data shows. Investors often turn to equity calls hoping to profit on a stock price rise and directional sentiment, based on option order flow was 54 percent bullish.

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On Wednesday, all three major Wall Street indexes fell more than 4 percent, while Motorola Mobility shares ended down just 0.1 percent at $23.09.

The almost unchanged price of Motorola Mobility shares that day even as the strongest stocks were hit “raised eyebrows among our crew,” said Jon Najarian, co-founder of online broker Trademonster.com.

Among the most popular options were the out-of-the-money August $25 calls with almost 4,000 contracts traded. Out of that volume most were bought, according to Najarian’s data.

Many of the $25 calls were purchased for 60 cents apiece last Wednesday and traded on Monday as high as $13.80 per contract, about a 2,300 percent return for those who held onto the calls, said Gareth Feighery, a founder of Philadelphia-based options education firm MarketTamer.com.

Unusually, large call volume was also evident Wednesday in the near-the-money strike prices for August, September, October and January 2012 options, Feighery said.

The October $23 strike calls for Motorola Mobility traded nearly 7,300 contracts last Wednesday, compared to just 43 puts at the same strike price.

Frederic Ruffy, options strategist at WhatsTrading.com, said the unusual action was on speculation that billionaire investor Carl Icahn, Motorola Mobility’s largest shareholder, was interested in boosting his stake or buying the mobile phone maker.

“Players were reacting to speculation that Carl Icahn was interested in the company,” Ruffy said. As of July 20, Icahn owned 11.3 percent of Motorola.

The US Securities and Exchange Commission, which investigates unusual stock and options activity, declined to comment on Monday. Motorola Mobility shares jumped 56 percent to a new high of $38.13, while Google shares slipped 1.2 percent to $557.23.

Motorola Mobility options volume was 9.8 times greater than than normal levels on Monday with 100,000 calls and 41,000 puts traded on the day, according to Trade Alert. Feighery said the deal’s large $2.5 billion break-up fee makes it likely the deal will close. As a result, volume in Motorola Mobility put options is low. This highlights “the reluctance among the options community to even speculate on the failure of the deal,” he said.

(Reuters)