Large Option Trader Makes A Killing On Suspiciously-Timed HP Trade

HP Inc HPQ shares jumped higher by 10% on Wednesday on reports that Xerox Holdings Corp XRX has made a buyout offer for HP.

HP bulls celebrated a great day on Wednesday, but certain call option holders made a killing.

Jon Najarian’s MarketRebellion picked up on unusual bullish call buying activity in HP on Tuesday afternoon and issued an alert to subscribers at 3:37 p.m. A trader had purchased 2,200 weekly HP call options expiring on Friday with an $18.50 strike price at prices of between 11 cents and 14 cents per contract.

Hitting The Jackpot

Those options closed Tuesday’s session at a price of 16 cents. Following the buyout news, however, the prices of those contracts skyrocketed by 1,150% in early Wednesday trading to around $2 per contract. Given the trader buying call options on Tuesday placed roughly a $25,000 bet, he or she theoretically profited roughly $300,000 on Wednesday.

“It would appear some news of the potential tie-up leaked, as our HeatSeeker picked up strong buying of HPQ weekly (November 8th expiry) 18.50 calls yesterday for $.11 to $.14,” Najarian told Benzinga.

Najarian said a spike in volume was another signal that something strange was going on in the HP option market.

“Volumes of calls trading yesterday spiked to 10,400 contracts versus the 4,400 contracts it averaged per day last week,” he said.

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Benzinga’s Take

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock. Unfortunately in this case, the timing and size of the large trades are particularly suspicious and could be a sign that the trader actually had access to inside information prior to public reports of the deal.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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Photo credit: włodi, flickr