Unusual trades in Countrywide calls raise eyebrows

CHICAGO (Reuters) - Unusual call trading in Countrywide Financial Corp on Thursday before news that Bank of America Corp was in talks to buy it has some option players asking if word of a pending deal had leaked to the market.

About 304,000 calls compared with 248,000 puts traded in Countrywide, a combined volume five times its normal level, according to market research firm Trade Alert.

“It looks like somebody was informed because the call volume in Countrywide was so heavy earlier in the day ahead of news that Bank of America may be close to a deal for the mortgage giant,” said Jon Najarian, co-founder of Web information site in Chicago.

That included about 19,000 January contracts, allowing holders to buy Countrywide stock at $5, which traded before the stock leaped above $8 after the Wall Street Journal reported the possible takeover of the top U.S. mortgage lender.

Later, sources familiar with the matter told Reuters that Bank of America, the second-largest U.S. bank, was in advanced talks to take over Countrywide, whose shares ended the day more than 50 percent higher at $7.75.

The January $5 calls closed at $3.20 a contract, up from a range of 65 cents to $1 earlier in the day. The 19,000 $5 calls apparently bought before the news represented a paper profit of a potential $4 million at the end of the day, Najarian said.

It is hard to pin down whether unusual option trading stems from insider information because it can also be speculation of a merger or just plain luck. Either way, these call buyers made a well-timed bet.

“It’s possible that the news was leaked in the hours prior to the takeover buzz,” said Frederic Ruffy, analyst at California-based options education firm Optionetics.

He noted that trading in Countrywide options was brisk before and after the takeover speculation triggered the surge in the stock price.

“While some of the trading remained defensive early in the day amid ongoing worries about the lender’s financial woes, there was also a noticeable increase in call volume,” Ruffy said. “More than 60,000 calls had traded before the stock surged on the news in afternoon trade.”

On Wednesday, despite a negative tone surrounding Countrywide and very active Countrywide puts, the calls were also unusually active, said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.

This continued on Thursday before and after the Bank of America news. “People were expecting some kind of announcement that would jolt the stock as many option traders bet on volatility plays,” Lefkowitz said.

Editing by Braden Reddall