Trading in Leap reportedly probed

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Richard Drew

Regulators are reportedly investigating unusual option activity in Leap Wireless just before its acquisition was announced by AT&T last month.

The probe is being sprearheaded by the Chicago Board Options Exchange on behalf of the Options Regulatory Surveillance Authority, according to a report by USA Today. The CBOE will be looking into the purchase of a large number of calls on July 12, only hours before AT&T disclosed the $4 billion takeover after the market closed that day.

Leap had averaged barely 1,200 options per session at the time, but that day volume spiked to nearly six times that amount. OptionMonster's tracking systems detected heavy call buying in the July 9, Aug. 9, and Oct. 8 strikes. The activity stood out even more because more than 80 percent of the trades occurred in the final two hours of a Friday session in the summer, when option activity is typically at its slowest.

The prepaid-cellular company was up 2.57 that day to close the regular session at $7.98. But the stock more than doubled in extended-hours trading after AT&T announced the buyout at a price that was the equivalent of $15 per share.

"Those call buyers now stand to make a fortune. The August 9s, for instance, mostly traded for $0.42 but will be worth more than $8 if Leap holds its price from late Friday," OptionMonster co-founder Jon "DRJ" Najarian wrote the following Monday in an article picked up by CNBC. "The October 8s, bought for $1.03, will likely fetch more than $9, and the July 9s will probably soar a ridiculous 8,700 percent from their $0.09 entry price."

"The question now," Najarian wrote in a line that was quoted in the USA Today article published yesterday, "is whether someone will end up in jail for insider trading."

—By CNBC Contributor Mike Yamamoto

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Additional Views: Leap Wireless calls spike before deal

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Mike Yamamoto is managing editor for OptionMonster. Neither Yamamoto nor Najarian has any positions in LEAP.