Stacy Summary: An interesting piece from Bloomberg highlighting the concept called ‘signal amplification,’ where traders place massive bets based on signals from the options market . . . even if they don’t know who has made that signal as it were.
How $170,000 in Options Moved Clorox Shares $450 Million
Just before 1 p.m. on June 9, 5,700 options tied to Clorox Co. (CLX) were bought on U.S. markets for about $170,000. Traders snapped up the underlying stock and within half an hour, more than $450 million had been added to the bleachmaker’s shares.
Ten days earlier, RadioShack Corp., the struggling electronics retailer, jumped as much as 33 percent, adding $40 million to its stock capitalization, after someone purchasing $600,000 in bullish call contracts ignited a rally in the equities. The stock rose to $1.45 from $1.32.
Jim Rickards looked for this sort of action to find insider trading on 911 and described this to us from 16.20 – 19.45 of episode 583.
As Rickards argues re: 911 trades, so too does Bloomberg argue re: Clorox:
It’s never obvious who’s buying options, though investors may believe it’s people who have developed special insights into a stock, even illicitly. Years before last week’s trades, transactions took place in Clorox contracts prior to takeover announcements by Carl Icahn that are now piquing the interest of federal regulators, a person familiar with the matter said.
“This is where the smart money plays, in the options market,” Joe Kunkle, founder of OptionsHawk.com, a Boston-based provider of market data and analytics, said by phone. “You follow the large trades and you can take part in the gains without doing your research.”
That is, some people were clearly trading on insider, illicit information and that trading was noticed by others in the market who figured someone knew something and was trading illegally, but it was worth riding the momentum of the trade before the information came out.