Monday, July 23, 2012

Nexen (NXY) - Pre-Takeover Order Flow Looks Like Insider Information; How to Make $32 million (3,200%) in a Week

NXY is trading $26.06, up 52.7% with IV30™ down 17.7%. The LIVEVOL® Pro Summary is below.


Click for Free Trial


This is a quick note on some very suspicious order flow in NXY before the takeover news, announced today. First, the news:

Cnooc: China’s Cnooc unveiled what would be Beijing’s biggest deal yet for energy resources abroad, with a $15.1 billion pact to acquire Canada’s Nexen.

Source: WSJ via Yahoo! Finance; Deals of the Day: Cnooc Reveals Big Deal for Nexen

Let's get right into the suspicious trading. First, I've included a small snippet from the Stats Tab, below, to establish the "average."

We can see that the average daily option volume is ~1,500 contracts a day. Note that if I take out the three days that I'll be discussing, that average is actually just 387 contracts a day.

On Friday (the last trading day before today), some enormous volume came into the Dec options.

I've included the Options Tab from Friday along with the largest trades of the day, below.

Specifically we can see that ~20,000 Dec 19 calls were purchased and funded by a sale of ~10,000 Dec 16 puts. The total cost of the 20,000 x 10,000 was ~:

20,000*$0.88*100 - 10,000*$1.21*100 = $550,000 (or $0.55 for 10,000 2x1 risk reversals)

I've included the the Options Tab from today, below.

Those puts sold are now worthless and the calls are worth ~$7.30. In total, that positions is now worth $14.5 million for a $14 million win (2,800%) in one trading day.

Honestly, that's really enough to complete the article, but there's actually more. A lot more.

On 7-16-2012 and 7-17-2012 20,000 more risk reversals traded in Sep. I've included the Options Tabs from those two days, respectively.

We can see the Sep 16/17 risk reversal (selling puts to buy calls) ~20,000 for an average price of ~$0.15 or a $450,000 outlay. Looking back to the Options Tab for today (above), that position is now worth $18 million for a $17.55 million win or 3,900% percent in a week.

In total on those three days, 70,000 contracts traded representing 6,000% of daily option volume and profited more than $32 million on an outlay of $1 million. I also note that on two of those three days (7-16 and 7-20), the stock volume was right around the average, so it doesn't look like the options trades were tied to stock.

This is probably the most compelling / suspicious order flow I have seen in a takeover in several years. In fact, it's so suspicious and so large, it poses the only real doubt I have that perhaps something else was at play. If the trades were done at 1/10 the size, so $100k turned a $2.5 million profit, I would be screaming bloody murder, but this is so big I almost doubt my suspicion...

I said almost...

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

This is trade analysis, not a recommendation.

Legal Stuff: