Loeb's Move on Sony: Did Traders Have Advance Word?

Sony TVs on display
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Sony TVs on display

A surge in option market bets on Sony just before a large hedge fund investor announced a big stake and called for a major restructuring of the company has raised concerns that some traders may have had advance word of the news.

U.S.-listed shares of Sony jumped 9.9 percent to close at $20.76 after Daniel Loeb's Third Point hedge fund said on Tuesday it accumulated more than 6 percent of Sony's shares - a stake worth $1.1 billion - making it the largest shareholder in Japan's biggest electronics company.

But on Monday, the day before that announcement, trading volume in Sony options soared by more than seven times the average daily activity in the last three months. Volume in its stock rose to 6.1 million shares, more than doubling the average 2.7 million shares over the past 25 days.

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Investors zeroed in on June call options at $19 a share on Monday, which at the time were slightly out-of-the-money when U.S.-listed shares closed at $18.89. Nearly 10,000 of those calls were bought on Monday for around 87 cents on average. Those calls, each representing 100 of the underlying shares, were worth $2.20 on Tuesday, which works out to about a potential $1.33 million profit.

"Monday's trading in Sony options appears suspicious, considering the extraordinary volume relative to their average and the bullish direction of those bets," said Ophir Gottlieb, managing director of options analytics firm Livevol.

There is no specific evidence that the trading was based on any prior knowledge of Loeb's announcement and some said it is possible the activity may reflect speculation that shares will continue to rise along with the rest of Japan's stock market, which has been rallying in recent months.

"Options bets initiated in Sony in both calls and puts on Monday seemed very well-timed ahead of this news but given the rally in U.S. and Japanese markets, this could be an allocation of capital to assets that have been sharply increasing in value," said Henry Schwartz, president of options analytics firm Trade Alert.

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The department of market regulation at exchange operator CBOE Holdings does review unusual trading activity on a regular basis, but it does not comment on any specific situation, a CBOE spokeswoman said.

The U.S. Securities and Exchange Commission, which looks into unusual stock and option activity, declined to comment.

A representative for Sony was not immediately available for comment.

But some in the options market said they thought word of Loeb's position could have leaked into the market.

Loeb, 51, is one of the best known figures in the secretive hedge fund industry with a record of clashing with corporate executives over strategy, including engineering a successful boardroom shake-up at Yahoo last year.

Loeb, in announcing his stake, called for Sony to sell its entertainment arm.

Gottlieb said the fact that Sony had released earnings only last week - often a major focus for share and options trading - meant there was a greater chance the surge in interest on Monday may have been related to some insider knowledge.

A recent study done for Reuters found there are numerous examples of unusually heavy options trading prior to market-moving news.

Volume Zooms

On Monday, traders exchanged 43,000 calls and nearly 16,000 puts on Sony's stock, Livevol data shows. Over the last three months, Sony has averaged 8,331 contracts traded per day with 5,175 calls and 3,155 puts, according to Livevol.

Trade Alert said total option volume on Sony on Tuesday exceeded 72,000 contracts, a record for the stock, eclipsing Monday's record of nearly 59,000 option contracts traded.

A call option gives an owner the right, but not the obligation, to buy an underlying security at a certain price by a set date. A put option gives the holder the right to sell shares at a given price by a certain date.

"Option traders on Monday started to load up on cheap directional bets on Sony, most likely due to information being disseminated on trading desks before it was publicly available," said Steve Place, a founder of options analytics firm investingwithoptions.com in Mobile, Alabama.

Japan-listed shares of Sony have soared 96 percent this year to 1,877 yen each as of Tuesday's close, as the struggling electronics giant has aggressively cut costs and sold assets.

Last week, Sony reported a 2012/2013 operating profit that was its highest in five years. The company is now betting on smartphones to offset declining sales of TVs, cameras and gaming consoles.

Some investors may have reaped a tidy windfall with well-timed directional bullish bets that involve both buying calls and selling puts.

The most active calls on Monday were the May $20 strikes where 15,000 contracts were bought for a premium of 15 cents each, Trade Alert said. Those calls cost $1 per contract during Tuesday's session.

The buyer of those May $20 strike calls paid $225,000 for the 15,000 contracts on Monday to close out an existing position, Schwartz said. Had they done so on Tuesday after the share price rally, the cost would have been much higher, around $1.5 million.

There was also substantial selling of put options in the June $16 and $17 strikes on Monday. Selling put options is a neutral to bullish strategy. The increase in the share price caused those puts to decline in value, resulting in profits for those June sellers, Schwartz said.