NRG option activity raises eyebrows before Exelon bid

CHICAGO (Reuters) - Unusual bets that shares of NRG Energy Inc (NRG.N) would rise before Exelon Corp made an unsolicited buyout offer for the independent power producer has raised questions among some option participants on whether the news was leaked ahead of time.

Exelon (EXC.N), the largest nuclear power operator in the United States on Sunday offered to pay $6.2 billion in stock for NRG. Executives from both companies met on September 30, but the meeting was not disclosed until Sunday night. The offer represented a 37 percent premium over NRG's closing price on Friday of $19.33, which was a 6.3 percent gain on the day.

NRG shares on Monday rose 29.33 percent to close at $25 on Monday on the New York Stock Exchange.

NRG's option activity averaged 14,398 contracts per day so far in October. But last week the option volume was heavier than usual on two days with the overwhelming majority on the call side, according to the Options Clearing Corp.

The U.S. Securities and Exchange Commission declined to comment on the unusual option activity.

Part of that volume surge could be related to the monthly expiration of October options, an event that can create more turnover when traders close out positions or roll them out to November, the next front month or later dated months.

The circumstances surrounding the call activity may also reflect speculative bullish bets or plain luck rather than insider trading.

But Jon Najarian, a founder of Web information site optionmonster.com in Chicago, viewed the activity as "strange" even on an expiration week.

"I believe someone got wind of the Exelon bid and got some calls, and/or created some synthetic calls by buying puts and buying stock at the same time to profit from an advance in the stock," he said.

Equity call options allow investors to purchase the company's shares at a predetermined price within a specified time period. A put option conveys the right to sell the stock at a given price and time.

On October 14, 15,622 NRG contracts changed hands with 69 percent on the call side and on Oct 15, volume was 87,076 contracts traded and 98 percent were on the call side, OCC data show.

According to Najarian's proprietary computer model, some investors focused on the December $17.50 and November $20 call strikes, the bulk of which were bought during those two days.

Things also started to get interesting two weeks ago when some lucky players appeared to have zoomed in on NRG call options, allowing them to buy what is now a $25 stock for $20 a share.

On Oct 7, it looked like 5,652 November $20 call contracts were bought at $2.35 a contract, said Michael Schwartz, chief options strategist at Oppenheimer & Co Inc in New York.

On that day, NRG shares traded in a range of $20.85 to $17.17 and closed at $17.59.

"This does not pass the smell test and qualifies as a highly unusual trade," Oppenheimer's Schwartz said. "It appears that these out-of-the-money November $20 options were purchased in anticipation of some newsworthy event."

A call option is out-of-the-money if the strike price is greater than the market price of the security and buying these calls gives an investor a chance to profit handsomely if the share price rises.

The November $20 calls traded as high as $6.30 a contract on Monday and are now deep in-the-money. During the afternoon, more than 1,500 contracts traded in the strike price, against existing open interest of 6,421 lots.

Najarian surmised that investors or an investor may have sold stock against these in-the-money calls to reap a profit instead of selling the calls.

Other option participants said the unusual call volume last week and on October 7 did not point to insider trading in the options market, where it is often detected first.

"The biggest trades by far occurred on October 15 but those were calls being sold to close positions involving the December $30 and $35 strikes. The little call buying there was did not look unusual," said Henry Schwartz, president of New York-based Trade Alert, an option analytical firm.

(Editing by James Dalgleish)