Tuesday, June 17, 2014

* TW Telecom (TWTC) - Why the Cheater in the Option Market Ahead of Takeover... May Not Have Been.. at All...

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TWTC is trading $39.64, up 1.7% with IV30™ down 3.1%. The Symbol Summary is included below.

Provided by Livevol

This is a note surrounding what appeared to be a cheater in the option market ahead of takeover news. But, how's this for a change of my normal tune, I don't think this is as bad as it looks, I can prove to you that it isn't and I'm not sure anything improprietous happened at all. But, it's awfully suspicious, that's for sure.

Let's start with the Stats Tab:

Provided by Livevol

Fact #1: Over the last three-months, TWTC has averaged just 54 calls traded a day in total across all strikes and all months.

Fact #2: On 6-13-2014 TWTC traded 2,351 calls.  Of those, ~2,000 were in the Jun and Jul 35 strikes.

The Option Tab from the close of the day is included below.

Provided by Livevol

Fact #3: The open interest (OI) in those two lines before the trades was 1 (one) and 89.  That means there was one open call and 89 open call positions, respectively, in each strike.

Fact #4: This news came on Monday:

Level 3 has agreed to acquire Ethernet service provider tw telecom for $40.86 per share in a cash and stock deal worth $5.7 billion, the companies confirmed on Monday.

Rumors have been swirling around a possible tw telecom acquisition for years now, with first CenturyLink Inc. (NYSE: CTL) and then Level 3 as the likely buyers.

The $5.7 billion valuation is a 12% premium over tw telecom inc. (Nasdaq: TWTC)'s Friday closing price of $36.34.

Source: Light reading via Google Finance Level 3 to Acquire tw telecom for $5.7B, written by Sarah Reedy.

The stock chart looks like this:

Provided by Livevol

So, a jump in stock price.

Fact #5: On Friday, TWTC stock was up 12.4% with volatility exploding.

That's circumstantial evidence that more than "someone" knew something (i.e. rumors were abound).

Fact #6: A good deal of that option trading in the Jun and Jul 35 calls was very early in the morning, before the stock rallied.

Let's turn to the Options Tab on the close of Monday trading, 6-16-14:

Provided by Livevol

Fact #7: Note that the OI in the Jun 35 and Jul 35 calls was 329 and 230, respectively. The July OI went up just 141 contracts... hardly an eye popper.

How is it possible that ~2,000 new calls traded on Friday but the total OI only went up ~400?

Simple:  The trades were not all purchases.
Example: If 100 contracts trade in a day, but 50 were initiated by a buyer and 50 were initiated by a seller, the net OI change is 0 (zero).

So what we see here is that a lot of the action in the calls were in fact opening sellers. 

Since OI did rise with volatility rising as well, it appears based on the trade prices that the majority (not the entirety) of the calls were purchased.

Fact #8: The apparently obvious cheater in the option market that first blush revealed with 1,000 Jun and Jul 35 calls purchased right ahead of a takeover was in fact over blown since so many of those contracts were opening sales.

Opinion: This feels suspicious but is nowhere near obvious. Takeover speculation and small changes in OI are evidence:  The first is circumstantial, the second is verifiable.

This is trade analysis, not a recommendation.

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