The Stock Market is Rigged!
Insider trading is an unfortunate reality in the trading world. And traders with insider information concerning soon-to-be-announced takeovers often use the power of options to make massive returns.
In an options trading education piece that I recently wrote for subscribers of Cabot Options Trader and Cabot Options Trader Pro, I highlighted how one such trader turned an investment of $507,500 into a profit of $4,130,000 overnight, using insider information and options trading.
Here’s what I wrote to my subscribers on May 12.
“I’ve said many times that traders use calls and puts to gain market leverage when they have insider information. Yesterday was one of the most blatant examples of this I have ever seen. (Be prepared to be shocked at how ‘unfair’ this is!)
“Over the course of the day yesterday, in trades of five to 10 contracts at a time, a trader amassed a position in Monsanto (MON) Calls that expire this Friday.
“Because his trades were so small, they flew below my radar (my scanner picks up on trades of 50 contracts and above). The trader was likely trying to avoid detection by the SEC, and that’s likely why he didn’t make the trades in larger blocks.”
What is critical to pay attention to in this story is the price of the stock at the time of the trades (91) and how much time until these out-of-the money calls were set to expire (two days). This trader needed a BIG move higher in a short amount of time.
Insider Information and Options Trading
With the stock trading at 91, here are details of his call buys:
1,800 Monsanto (MON) May 90 Calls (exp. 5/13) for $1.70. These calls would need MON to trade above 91.70 by expiration on Friday to break even.
1,500 Monsanto (MON) May 93 Calls (exp. 5/13) for $0.395. These calls would need MON to trade above 93.395 by expiration on Friday to break even.
2,700 Monsanto (MON) May 95 Calls (exp. 5/13) for $0.30. These calls would need MON to trade above 95.30 by expiration on Friday to break even.
3,500 Monsanto (MON) May 100 Calls (exp. 5/13) for $0.175. These calls would need MON to trade above 100.175 by expiration on Friday to break even.
In total, this was a capital outlay of $507,500 for calls expiring in two trading days. The trader needed a BIG move, QUICKLY. And yesterday, there were no known catalysts for such a move.
How a Trader Turned $500,000 into a $4 Million Profit
But this news story hit Bloomberg this morning:
“Bayer AG is exploring a potential bid for U.S. competitor Monsanto in a deal that would create the world’s largest supplier of seeds and farm chemicals, according to people familiar with the matter.
“The German firm has held preliminary discussions, internally and with advisers, about buying Monsanto, which has a market value of almost $40 billion, said people who asked not to be named because the deliberations are private.
“Monsanto rose 10% to $99.47 at 9:55 a.m. in New York after news about Bayer’s interest and a report from StreetInsider late yesterday that BASF SE is working with advisers to explore a takeover offer. The shares earlier rose as much as 12%, the largest gain since 2009.”
Following the release of this story, Monsanto traded at 100, higher by 10.5% just hours after the call buys. With MON trading at 100, here’s what the calls are now worth:
May 90 Calls (exp. 5/13) bought for $1.70 are now worth $10, or a profit of $1,494,000.
May 93 Calls (exp. 5/13) bought for $0.395 are now worth $7, or a profit of $990,750.
May 95 Calls (exp. 5/13) bought for $0.30, are now worth $5, or a profit of $1,269,000.
May 100 Calls (exp. 5/13) bought for $0.175, are now worth $1.25, or a profit of $376,250.”
The trader’s total outlay for the MON call option contracts was $507,500.
His total profit from his MON call options contracts was $4,130,000.
I am both impressed and horrified at the brazen way this trader used this insider information. I am impressed that he kept the call buying limited to small lots, which would fly under my radar. But I’m horrified at how dumb the trader could be to think that buying that many calls hours before the news broke would not attract the attention of the SEC.
While I didn’t recommend an option to follow the Monsanto trades, my subscribers and I often do follow the big traders into similar options—which is entirely legal—and profitable!
My proprietary options trading scanning tool searches the market all day looking for unusual options activity, and has helped us profit from winning positions in Nvidia (NVDA) June calls for a gain of 502% and PowerShares QQQ Trust (QQQ) July puts for a gain of 67%, and we currently have profits of 80% in Pfizer (PFE) January calls and 65% in SPDR Biotech ETF (XBI) August calls.
To receive more information on how you can profit from options trading, click here.