Is Paris Hilton taking stock trading tips from Martha Stewart?

In the past Mike Fowlkes, Sarah Gilbert and I have pointed out what seems blatant illegal activity in Dow Jones (NYSE: DJ) and Aquantive (NASDAQ: AQNT). Now there is activity in Hilton Hotels (NYSE: HLT) worth taking a look at.

Hilton Hotels closed up 9.34 to $45.39 today on news the company agreed to be acquired by Blackstone Group (NYSE: BX) in a deal valued at $26 billion. A reader pointed out interesting activity on Hilton Hotels.

With the stock up, let's look and see how many "lucky" traders picked up calls on the stocks. A call option gives the buyer the right to buy the stock at a set price. If you think a stock is going to go up you can buy the right to buy that stock at a set price, in the hopes that it does in fact go up, as you expect.

The Hilton July 35 calls (HLTGG) had a volume of 3,660 Tuesday with a high price of $1.90. That is above the average volume of 314 calls per day since the options were issued and just above the previous record high daily volume of 3,616 on 5/31. Those calls are now worth about $10.50 a piece so a 450% gain over two days isn't bad. I have to say this looks suspicious; sort of like a man running from a bank with a bag of money.

Looking at the Hilton August 40 calls (HLTHH) it becomes a little more obvious. Tuesday there were 5,844 contracts for 0.85 cents or less. In the past three weeks -- since the options came out there were only a total of 70 contracts traded. The contracts bought Tuesday are now worth about $5.80 a piece. A 582% gain in two days, representing about $2.8 million in profits.

If that isn't enough money ...there is more. The July 40 calls (HLTGH) saw 3,312 contracts trade Tuesday for less than 0.40. Now at 5.50 it is a 1,275% return for another $1.6 million in profits.

While I do not know who made the trades, their intentions and what they knew when; I am betting they will soon be getting a call from the SEC. In all fairness, just because I see a man wearing a black ski mask running out of the bank carrying a bag of money and a gun doesn't mean he is a bank robber. These trades could be legit, but they trades have all the tell-tale signs of insider trading. By the way has anyone been following Paris recently? Has she been meeting with Martha Stewart?

Kevin Kersten is an Options Analyst with InvestorsObserver.com. Do you have any deadwood in your portfolio? Check out the 18 Warning Signs That Tell You To Dump A Stock.

Disclosure note: Mr. Kersten owns and or controls a diversified portfolio of long and short positions that may include holdings in companies he writes about.