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Last week one of our bloggers, Kevin Kersten, noticed something a little strange about call options on Dow Jones. Mr. Kersten did a little research and noticed that there was some pretty intense buying of Dow Jones on the day before News Corp. (NYSE: NWS) announced it had made a bid to buy Dow Jones & Co. (NYSE: DJ). Well, it looks like Mr. Kersten was not the only one doing his homework as news has come out that federal and state authorities are investigating suspicious options trading.Dow Jones announced yesterday that it had been sent a subpoena from the New York attorney general's office and also a request from the Securities and Exchange Commission regarding options trading. This comes after news last week that the other company involved, News Corp., had received a subpoena from Cuomo's office and an inquiry from the SEC.
As Douglas McIntyre pointed out yesterday, the possible deal between the two companies now appears to be falling apart, but on the day of the deal announcement buyers flocked into Dow Jones and pushed shares up over 54%. Shareholders of the stock had to feel pretty good about their investments on that day, but not nearly as good as the lucky ones that actually owned call options on the stock. These investors made a killing on that day, but as Mr. Kersten pointed out, questions were immediately swirling around insider trading information.
So what exactly is raising eyebrows? When taking a closer look at Dow Jones call options we see that between January and March there were about 7,000 call options that traded during the entire three months. Then compare that with the activity in the days that led up to the announced deal proposal and the numbers suddenly spiked to the upside. On the day right before the announcement Mr. Kersten pointed out that there were 3,464 September 45 calls (DJ II) traded. Wow... as you can see there were almost half as many calls traded in one day as there had been during the entire first three months of the year. That had to raise a little concern. All said and done there were roughly 10,000 call options traded in the last days of April.
If you ask me, Mr. Kersten was right on with his initial thoughts that we were going to see insider trading charges come out. Cheating only works if you don't get caught, and this time it looks like someone is going to get caught. With the volumes that these people started trading these calls, I would have to hope that one day the guilty get their 15 minutes of fame on "world's dumbest criminals."
Michael Fowlkes has worked as a stock trader for seven years and spent the last two years working as an analyst for the online investment advisory service Investor's Observer.
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