magicjack (CALL) - The Anatomy of a Cheater; A Beautiful Inside Trade?

CALL closed Wednesday trading at $17.32, up 4.8% with IV30™ down 1.4%. The Symbol Summary is included below.

Provided by Livevol

magicJack VocalTec Ltd (magicJack VocalTec) is a provider of voice-over-Internet-Protocol (VoIP), the softphone (magicJack PC) and the magicJack products. magicJack VocalTec’s product include magicJack and magicJack PLUS, magicJack PC and magicJack APP.

This is a note on some very unusual trading in the option market ahead of a stock pop that more than doubled the speculator's bet.  I was made aware of this fascinating phenomenon by Kaitlyn Kiernan from WSJ.  She wrote a bang up piece on it, which you can read here:

MagicJack Options Trade Hits Jackpot, But Raises Questions; Trade Comes Before Whitney Tilson Touts Company's Stock

I'm going to walk us through a thorough analysis of what appears to be not only improprietous trading, but devious even in that realm. This is really good stuff...

Let's start with the news, quoting Kaitlyn's article:

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Shares of the voice over Internet wireless communications provider surged 18% Monday after hedge-fund manager Whitney Tilson touted the stock late Friday in a newsletter.  MagicJack shares jumped $2.50 Monday, to $16.25, for the biggest one-day percentage gain since September 2010.

[On 1-27-2014] magicJack options trading volume soared to more than 10 times the daily average, according to options-data firm Trade Alert LLC. Behind the surge was big interest in February $15 call options, which each grant the right to buy 100 magicJack shares for $15 apiece through Feb. 21.

In less than two minutes, an investor bought about 3,500 Feb. $15 call contracts at an average cost of 48 cents a share, according to Trade Alert data, which doesn't show who the buyer was.
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But oh my, how this was done with such elegance.  Let's start simple.  I have included the Options Tab from the close of trading on 1-27-2014.

Provided by Livevol

Note that 8,832 Feb 15 calls traded on total daily average option volume of less than 1,000 contracts.  OK.. then what?...

At 3:28 a bunch of sell orders in small quantities came in on the Feb 15 call line.  I have included the Time & Sales Tab below.

Provided by Livevol

Note five things:
1. The small quantities.
2. The price of the market when it started ($0.35 x $0.50)
3. The price of the market when it ended ($0.35 x $0.40)
4. The time!  All trades executed at 3:28 EST.
5. These were sales (and thus the prices went down).

Now let's fast forward a full eight seconds, and look at the Time & Sales Tab again.

Provided by Livevol

Note three things:
1. The large quantities
2. The price paid for the largest trades ($0.35).
3. The time!  The trades executed anywhere from eight seconds to six minutes later.

So what happened?  This name doesn't have great liquidity (low option volume), and therefore a lot of small trades hitting the bid (sales) will lower the option price fairly quickly.  That's what happened at 15:28.

But then "someone" eight seconds later put in huge buy orders that were filled for $0.35 rather than the offer at $0.50 just eight seconds prior.

Yeah... It appears someone manipulated the market with small (but many) sales of the option that they intended to buy (and did buy).  In fact, they did it seconds later.

And what do you know, a week later (or whatever), CALL stock pops on "unexpected news" and how much are those ~$0.40 options worth now?...

Let's turn to the Options Tab as of the close today.

Provided by Livevol

They are now worth ~ $2.30.  Well, well.

Fool me once for trading size ahead of a stock pop.
Fool me twice for manipulating the price.

Is it possible this was a coincidence, or there was no impropriety?  Yes.

Do I think that's what happened.  No.

This is trade analysis, not a recommendation.

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