Thursday, August 29, 2013

Methode Electronics (MEI) - Stock Explodes to Decade High on Earnings; Pre-earnings Trading Very Suspicious

MEI is trading $23.50, up 33.3% with IV30™ popping 20.9%. The LIVEVOL® Pro Summary is below.

Methode Electronics, Inc., is a manufacturer of component and subsystem devices. The Company operates in four segments: automotive, interconnect, power products, and other. The Company designs, manufactures and markets devices employing electrical, radio remote controls, electronic, wireless and sensing technologies.

MEI is the single largest stock gainer today and pushed the stock to decade highs off of an earnings release that shocked everyone... Well, almost everyone... I believe that the order flow leading up to the earnings release does in fact reveal potential malfeasance – that is, the use of insider information to garner illegal profits. But this one is tricky – in so many ways.

Let’s get started with the Stats Tab, below.

Just one thing I want to note here, which is that the firm averages 36 total option contracts traded a day – that’s a three month (60 trading day) average. Those 36 contracts breakdown to average:

(1) 29 calls traded a day
(2) 7 puts traded a day

OK, keep those tiny numbers in mind as we walk through this analysis. This is a diagnosis, but first we need a symptom.

Let’s turn to the Options Tab as of right now, and look at the OI in the Sep 17.5 calls.

I’ve highlighted the strike in question. I first noted that the OI was pretty large for this name, in fact the total sum of the OI in all of Sep is 372, so those calls are 182% of the other OI in Sep (240 vs. 132).

OK, that’s the symptom.

Here’s the diagnosis.

The OI in those calls looked like this over the last few days:
8-26-2103: OI = 1
8-27-2103: OI = 115
8-28-2103: OI = 215
8-29-2103: OI = 240

Hmmm... The firm averages 29 calls traded a day yet the Sep 17.5 calls alone traded over 100x on 8/26 and 8/27 with earnings out on 8/29.

Well, what about those calls? On 8-27-2013 100 traded, but on the bid. So, they were probably sales, right? No, absolutely wrong. I hope you have LIVEVOL® Pro, but if you don't, watch this.

Here is the Time & Sales snapshot from that day for those calls, and then the real analysis.

OK, there’s one hundred trading $0.80 on the bid. But, check this out. Let’s look at the level II quotes at the time of the trade.

Look at PHLX. The NBBO before the trade was $0.65 x $0.85, then on PHLX someone posted a bid of $0.80 and that bid was hit. This type of trading does two things:

(1) Allows for a better execution than simply lifting the offer (which would have cost $0.85)
(2) It hides the trade by looking like it traded on the bid and was therefore a sale.

But this wasn’t a sale – we can see clearly that the initiator bid up the options and got their fill for $0.80. Was that just a coincidence? Well, let’s look at the day before.

I have included the same level II quotes at the time of a trade on 8-26-2013, below.

Here we see the NBBO was $0.85 x $1.20 before the trade then someone bid $1.15 and the offer dropped to $1.15 to match it. Again, that’s a hidden trade.

All in all, I see 239 Sep 17. Calls bought for ~$0.85 a few days prior to an earnings blowout that pushed the stock to a decade high stock price.

Total paper profits: 239 x 100 x ($6.00 - $0.85) = $123,085 on a $20,000 bet or a 600% gain in three days. How convenient...

This is trade analysis, not a recommendation.

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