Analyst sees unusual call trades before Komag deal
By Doris Frankel
CHICAGO, June 28 (Reuters) - Unusual trading in options positions that would benefit from a rise in Komag KOMG.O shares, placed before the disk-drive component maker put itself on the block, looked "suspicious," an options analyst said on Thursday.
Western Digital Corp. (WDC.N) has agreed to acquire Komag Inc., one of its last rivals in the U.S. hard disk drive industry, for about $1 billion in cash, the companies said on Thursday. Western Digital would pay $32.25 a share for all outstanding shares of Komag.
"I would say this unusual spike in call trading before the deal is suspicious," said Joe Sunderman, vice president of research and development at Schaeffer's Investment Research in Cincinnati, Ohio.
The U.S. Securities and Exchange Commission declined to comment on the surge in call option volume ahead of Thursday's announcement, which came after the close.
In several instances this week, the volume in Komag calls, granting investors the right to buy its stock at a given price and time, stood out dramatically, Schaeffer's data showed.
From June 25 through June 27, call volume on the front three months of June, July and September averaged 12,123 contracts, far outpacing Komag's average daily call turnover of 887 contracts for the entire year, Sunderman said.
That is nearly 14 times ordinary volume over the last few days in comparison to the rest of the year, he said.
Even on Thursday, Komag options were unusually busy as 6,736 calls vs. 4,488 puts crossed the tape, according to market research firm Track Data.
Particularly notable were the July calls allowing investors to buy Komag shares at $30 a piece within a few weeks, Sunderman said.
The July $30 calls traded 1,667 times compared to 5,374 contracts outstanding and cost $1.10, up 5 cents on Thursday.
Komag shares rose 49 cents to finish at $29.58. These calls with strike prices slightly higher than the market price would give an investor a chance to profit if the share price rises.
Indeed, Komag stock rose 7.6 percent in after-hours trade to $31.83, while Western Digital dipped 2 percent in extended trade to $19.15.
"Those options would be in-the-money if the shares rise to $32.25, the takeover price by July expiration," Sunderman added.
According to Options Clearing Corp, 14,783 Komag options traded on Wednesday, out of which 87 percent were calls. On Tuesday, 18,409 contracts crossed the tape and 88 percent of that volume were calls and on Monday, 23,026 contracts changed hands, out of which 83 percent were calls.
"Additionally. the technical price trend in Komag has been very poor, and in spite of this, the call activity on a laggard such as Komag is unusual," Sunderman said.
Komag shares have shed 22 percent in value since the start of this year.
It can be hard to pin down whether questionable trading in a target company's options stems from insider information, because it can result from pure speculation as a result of rumors or just plain luck.
