Some options traders appeared to have scored a win with well-timed bullish bets on Onyx Pharmaceuticals ONXX.O before a rival made an unsolicited bid for the cancer drug maker.
Onyx Pharmaceuticals said on Sunday it had rejected a $10 billion, or $120 a share, unsolicited offer from Amgen Inc (AMGN.O), far above Friday's closing price of $86.82 a share. The firm rejected the offer but said it is exploring a sale, and that sent the stock higher on Monday. The shares gained 51.2 percent to close at $131.33.
The surge in Onyx shares enabled some traders to reap a windfall by taking some profits off the table on a select number of call positions initiated last week.
On Thursday and Friday, traders enacted a few small-sized trades on Onyx call options - which give the buyer the right to buy the stock at a given price by a certain date - hoping to catch a share price rally by mid-July.
Onyx averaged 715 calls per day over the past 22 trading days, according to options analytics firm Trade Alert.
Call volume was notable on Friday, when a total of 1,561 calls changed hands, more than double the normal level, against 488 puts. On Thursday, traders exchanged 1,374 calls and 664 puts on Onyx, data from Trade Alert showed.
"This flow looks a bit suspect to me. It's possible the buyers knew of the deal and put that knowledge to work," said Trade Alert President Henry Schwartz. "The odds of turning a few hundred thousand dollars into millions overnight are very small, yet that's exactly what happened in Onyx options last week."
But some analysts said it is unclear whether the unusual trades were speculative or stemmed from sources knowledgeable about a pending offer.
The two most active calls on Friday were the July $90 and $92.50 strikes, with just a few hundred of each bought in the price range of $2.41 and $1.56 each, respectively, mostly in small lots. All of those strike prices gained by more than $30 on Monday, a big profit, Schwartz said.
Calls appreciate in value when the price of the shares rise. The timing of these select call trades could suggest that some people caught wind of the offer ahead of time. The Canadian newspaper Financial Post reported it on Friday, sparking a steep jump in Onyx shares in after-hours trading.
Two studies done for Reuters found there have been numerous examples of unusually heavy options trading prior to market-moving merger news.
Another stand-out trade took place on Thursday when a customer paid a premium of $2.70 per contract for 500 July $85 strike calls as a new position, Schwartz said.
"It looks like the long positions in the July $85 strike calls bought for $2.70 on Thursday are being sold today at $46.00 apiece," a gain that amounted to about a 1,600 percent profit, said Ophir Gottlieb, managing director of options analytics firm Livevol. The trades appear to be speculative and not necessarily indicative of insider trading, he said.
The bid/ask prices for the calls were about $46 and $46.70 late on Monday.
The U.S. Securities and Exchange Commission, which looks into unusual stock and options activity, declined to comment.
"The CBOE department of market regulation does review unusual trading activity on a regular basis. However, they do not comment on any specific situation," a spokeswoman for exchange operator CBOE Holdings Inc. (CBOE.O) said.
An Onyx spokeswoman also declined to comment on the options activity.
(Reporting by Doris Frankel; Editing by Dan Grebler)