Massive Surge In COMS Call Options Buying Day Before Hewlett Packard Purchase

In case you didn't hear, Hewlett Packard (HPQ) agreed to purchase 3Com (COMS) yesterday in an all-cash deal worth $2.7 billion dollars.

This works out to a $7.90 purchase price for COMS, which is about a 40% premium over where the shares of the company were trading earlier in the week.

COMS shares (and COMS call options) are predictably trading much higher today.

However, here's the problem - it seems as though someone caught wind of this upcoming transaction late Wednesday morning, as there was a massive surge in November and December call option purchases.

According to Bloomberg, "more than 8,000 3Com calls changed hands yesterday, 17 times the four-week average."

Of these 8,000 calls (right to buy shares), nearly 7,500 were the November and December $5 calls. Bloomberg points out that just six puts (right to sell shares) were traded yesterday.

Not only was there a surge in call buying activity yesterday, but the common shares of COMS also witnessed a surge of buying interest as well.

Shares in COMS were up around 5% yesterday, with more than 22 million shares trading hands (compared to an average daily volume of 5.7 million shares).

The buyer (or buyers) of the COMS November and December $5 call options made out very well, as the November 5 calls are up $1.80 to $2.45, while the December 5 calls are up $1.65 to $2.50. That's a massive gain, especially considering that this buyer (or buyers) just purchased their calls on Wednesday morning.

This all amounts to some pretty blatantly obvious insider trading, and it will be interesting to see how fast the SEC moves on this.

This very same thing happened in September with the Dell / Perot System purchase.

There was a huge surge in call option buying the day before the deal was officially announced.

Just a few short days later, the SEC announced that they had nabbed Reza Saleh, who had apparently netted nearly $9 million dollars after buying almost 10,000 Perot Systems' call options. The insider trading was so blatant that the SEC had no problem quickly identifying and apprehending Saleh.

According to the SEC, Saleh had worked for a couple of Perot Systems affiliate companies and had caught wind of the deal shortly before it was announced.

Who are these people that think that they can get away with something so blatant, especially when so many people are watching?

I mean seriously - do people actually think that market observers won't notice this type of activity?

I can pretty much guarantee that the SEC already has some of their people looking into this..

Filed under: Stock Market Scandals