* Bets placed Wednesday pay off as stock soars on Thursday
* Heinz overall call volume on Wednesday above average
* June $65 strike calls increase more than 20 times in value
By Doris Frankel
Feb 14 Well-timed trades in the U.S. options
market on H.J. Heinz Co before a takeover plan by
Berkshire Hathaway and 3G Capital was publicly disclosed,
prompted some option-market experts to question whether people
with knowledge of the deal made bullish bets ahead of the
Warren Buffett's Berkshire Hathaway Inc and
Brazilian private equity firm 3G Capital on Thursday announced a
$72.50 per share cash deal for the ketchup and baby food maker,
sending the stock up 19 percent.
On Wednesday, there was a sudden burst of bullish call
buying, expecting that H.J. Heinz shares would rally in coming
months, which may be too much of a coincidence to overlook. The
one-day gains on these bets would net at least a $1.5 million
paper profit, according to Trade Alert.
"The Heinz deal today has surprised many. But there was at
least one individual in the options market who knew that a deal
was imminent," said Jeffrey Rubin, director of research at
financial research firm Birinyi Associates Inc in Westport,
To be sure, the questionable trading could be the result of
innocuous speculation that can sometimes fuel action in the
The U.S. Securities and Exchange Commission, which looks
into unusual stock and options activity, declined to comment in
an email to Reuters. Exchange operator CBOE Holdings Inc
also declined comment.
On Wednesday, a total of 3,460 calls - contracts giving the
buyer the right to buy a stock at a certain price by a given
date - changed hands on Heinz, four times its recent daily
average of 820 contracts. By contrast, just 249 bearish put
options were traded, about half their typical daily level,
according to options analytics firm Trade Alert.
Nearly 2,600 of those contracts were in the June $65 strike
"To see call volume four times its normal level concentrated
in out-of-the-money June strikes immediately in front of a deal
is highly suspicious," said Trade Alert President Henry
Schwartz. "It looks to me like a case of somebody trading on
some good advance knowledge of the deal."
When investors speculate on a possible takeover, they
typically buy out-of-the-money calls because they can put less
money at risk and rake in a big return when a deal is announced.
Owners of these calls benefit when the stock rises because the
value of the call options also rise.
Trade Alert's Schwartz said more than 2,000 June $65 strike
calls traded on Wednesday for a premium of 30 to 40 cents per
contract. The calls cost a premium of just $92,000 at that
strike, he said. Heinz shares had closed on Wednesday at $60.48.
Heinz shares were up 19.7 percent in Thursday afternoon
trading at $72.38, having earlier hit a high of $72.60.
Meanwhile, the cost of the June $65 strike calls soared to $7.50
per contact - which could result in a $1.5 million paper profit,
Wednesday's volume in those $65 June calls came to 2,593
contracts. Over the last three months, average daily volume for
all Heinz call options was just 1,986 contracts, according to
options analytics firm Livevol in San Francisco. That's notable
because Heinz shares had never reached the $65, having hit an
all-time high of $61.75 in November 1998.
"It appears that some traders were betting that the shares
would trade above $65 for the first time ever in just four
months and the next day there is a takeover bid for well over
$65," said Ophir Gottlieb, managing director of Livevol.
"These trades are suspicious and incredibly well-timed."
The stock market has long had restrictions on insider
trading - where company officers or those in the know use
privileged information to trade stock ahead of an event.
But the options market also has surveillance which is under
the SEC and the U.S. options exchanges themselves.
The U.S. options exchanges, because of their proximity to
unusual activity, are often in a better position to determine
questionable trades. In 2006, they set up the Options
Surveillance Regulatory Authority, or ORSA, as a central
organization to collaborate on insider trading surveillance and
investigations for the U.S. options industry.
CBOE, which leads the coordinated efforts on the behalf of
the U.S. exchanges, said that it takes its regulatory
responsibility seriously and investigates unusual trading
"However, we do not comment on individual investigations," a
CBOE spokeswoman said.