Monday, December 21, 2009

Chattem (CHTT) - Identifying Order in Flow in a Takeover

SNY made a $93.50 cash bid for CHTT common stock. CHTT closed $69.98 on Friday, so the takeover price is a $23.52 or 33.6% premium. You can see the LIVEVOL™ Pro Summary below along with the corporate action. You can click the images to enlarge them.

There wasn't any obvious order flow on Friday in the calls, but a closer look uncovers at the very least a coincidence if not a hint of the possible deal.

Below you can see the open interest (OI) chart for the Jan 70, 75 and 80 calls (the highest strikes available at the time). Note that within two weeks the OI for all lines began to increase from 0 to 567, 1232 and 2092 respectively. Click the images to enlarge.

Using average prices (or estimates of average prices) for the options I see this profit from those trades by line (buying on offer, selling on bid):

70: Buy 567 for $1.45 <---> Sell now @ $22.80 <---> $1.2 million
75: Buy 1232 for $0.30 <---> Sell now @ $17.80 <---> $2.2 million
80: Buy 2092 for $0.15 <---> Sell now @ $12.80 <---> $2.6 million

For a total $6 million gain on $151,000 or 3900% in 13 days.

This type of order flow is much more common than the uber obvious 5,000 call purchases on the offer with ten minutes to go in the trading day. But, note that the dollar amount won is just as big.

Understanding order flow can be an exercise in memory and trend identification. At other times it's identifying the obvious. The accumulation of a position can be just as telling (if not more so) as the one time big bet.

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