Monday, June 24, 2013

STEC - Pre-takeover Order Flow Yields Two Types: A Good Speculator and a Possible Cheater

STEC is trading $6.71, up 86.9% with IV30™ down 69.2%. The LIVEVOL® Pro Summary is below.

STEC, Inc. (STEC) is a global provider of enterprise-class Flash-based solid-state drives (SSDs) that are designed for systems and applications that require high input and output (IO). The Company designs and develops its own SSD controllers, enhance them with firmware and integrate them with NAND flash media to manufacture SSDs.

This is an order flow note ahead of a takeover. I’m going to show two types of order flow – one that is incredibly suspicious, another that isn’t. Both made huge paper profits on the takeover news today, but it appears in two different ways.

First the news:
Western Digital (WDC) has agreed to acquire sTec (STEC) in a cash deal worth approximately $340 million. Under the terms of the deal, each WDC shareholder will receive $6.85 per share. The deal is expected to close by year end 2013.
Source: AP

The background to all of this is critical:

(1) The largest shareholder in STEC made a loud and public push for the firm to sell itself about six-months ago.
(2) The average daily volume in STEC is quite low relative to the trades we will be examining. I have included a snippet of the Trade breakdown section below.

Note the total average daily option volume over the last three-months for STEC is 568 options composed of 454 calls a day and 114 puts a day.

Now, the order flow. First, let’s look at what appears to be innocuous trading, with an intelligent but hedged speculation on a takeover.

Trading #1: Purchase of the Aug 4/5 Call spread

On 6-12-2013, it appears that ~1,400 Aug 4/5 call spreads were purchased for ~$0.15 (various prices). Note that combined, that makes ~ 2,800 options in just that trade, or nearly 5-fold the daily average.

That call spread is now worth full value ($1) and is up ~$119,000.

Notes to this trade:
(1) It was a spread, not a naked call purchase. If someone wanted to use inside information they would not have capped the upside – a naked purchase of the Aug 4 calls for ~$0.25 would be a $350,000 gain, or nearly 3-fold the gain on the spread.
(2) The trade date was 6-12-2013 – about two weeks before the announcement.
(3) The expiry chosen was August, giving the position more time but also costing more – again, not the finger print of a fraudulent trade.

Trading #2: Purchases of the Jul 3 calls naked

On 6-21-2013 (i.e. Friday) it appears that ~1,200 Jul 3 calls were purchased naked (uncovered) for ~ $0.60. Those calls are now worth $3.75 for a $380,000 gain.

Notes to this trade:
(1) The trade date is exactly one day before the deal – suspicious.
(2) The trades are in the front month – suspicious.
(3) The trades are naked (no spread) – suspicious.

In my opinion what we have here is one of three things:

(1) Cheaters all the way around (might even be the same people I both trades)
(2) No cheaters all the way around
(3) A cheater in one but not both of the trades

In my opinion, the spreads look either to be normal speculation on a firm known to be a takeover target or a very savvy trader using insider information knowing full well how to hide the obviousness of the trade.

In my opinion the naked Jul 3 call purchases are highly suspicious and could in fact be circumstantial evidence of malfeasance.

Either way, this is a really interesting examination of order flow pre-takeover.

This is trade analysis, not a recommendation.

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1 comment:

  1. Friday was expiration for june options right? is it possible the july buyer was replacing a june option that was expiring? I believe about 1000 June calls expired otm on friday so do you think its possible the buyer just 'rolled' them without closing the worthless junes?