Hartford Financial (HIG): Anatomy of Rumor Trading in Options and a Suspect Trade

For options traders it has become common knowledge that certain takeover rumors will see a mid-day spike once CNBC's Fast Money airs and one of the Najarian's from OptionMonster discuss takeover rumors and unusual options activity that gets the general public excited enough to jump in and push not only the stock price higher, but also the implied volatility of the call options, a double-win for anyone already invested in the calls.

This almost every day occurrence allows for "scalping" calls for quick gains, as the excitement usually dies down in less than 15 minutes and normal trading resumes.

My problem with this is that citing options activity as "unusual" when it has taken place after takeover chatter made its way around trading floors and news wires is making false claims, and is misleading. In my opinion, options activity is only unusual and worth noting if it takes place without any news, takeover chatter, or other known event driving the trades. Chasing takeover chatter with options happens every single trading day, and should not be seen as unusual, nor should you read all that much into the options volume, as most of these trades are quick in and out trades that make the volume looks massive, while the next day you will notice the open interest barely changed.

Another issue is that the pumping is selective, usually to names that they are already invested in, looking for a quick flip, whether for personal accounts, or for subscribers to products that get the heads up. Numerous occasions they decide to proclaim unusual trading in options for a name that is just seeing small lots of contracts trade, no institutional interest whatsoever. The options action worth noting is when the trade sizes are larger, the trades are hitting the offer, and the implied volatility is rocketing higher, bending the IV skew.

Hartford Financial (HIG) trading today, September 10th, was one of the most blatant attempts at a quick score I have ever seen with this everyday pump and dump scheme.

At 9:45am I received a takeover rumor that Hartford Financial is in talks with Allianz (AIZ) on a possible deal, with a price in the $30's being the rumored price. Shares abruptly jumped from $22.32 to $22.75 in just 6 minutes, and then topped out at around $22.95 around 11am. This is a fairly small move for a rumor stock, especially if there was much truth to it. Shares then faded back towards $22.50 by 12:30pm, and the IV faded from 52% way back down to 44% in the September contracts. I would note that the largest options trade before 12:30pm was a seller of 300 January $22.50 puts, and one lone buyer of 290 September $23 calls. Most of the action before 12:30pm was very small rumor chasing action, only 4 or 5 trades of 100 to 150 contracts in the September $23 calls, low $ value trades in the closest OTM calls.

As 12:30pm came around shares of HIG started to bottom and pick-up a bit as most traders spread the word that it would be the name receiving the Fast Money Halftime mention. And then, at 12:53pm the largest trade of the day by a mile hit, a buyer of 7,600 September $26 calls at $0.12, a $91,200 purchase of calls that are 15.3% out of the money and expire in 1 week.......Seriously..... Now, at 12:56pm Najarian mentioned the action in Hartford Financial as "unusual" on takeover chatter and noted that he had already bought calls in HIG. The volume in HIG exploded and shares jumped from $22.65 to $22.95 and as IV jumped as well, the price of the September $0.26 calls immediate doubled to around $0.25. These calls were not tied to any shares, and were a straight bullish bet, and insane bet unless you were almost guaranteed that shares would head higher. Obviously you purchase the far OTM calls because the leverage will cause a larger % move in the price of the calls as volatility pumps higher.

Shares of HIG closed the day around that $22.95 mark and the September $26 calls closed at a mark of $0.18, a 50% gain and a nominal gain of $45,600. Many of the calls were likely shed before the end of the day, potentially immediately on the spike, and the open interest change on Monday will tell the story as to how many calls are actually willing to hold steady waiting for a buyout to happen within a week's time.

I posted the daily HIG chart below for a timeframe of the events and the share movement throughout the day.

After the Fast Money pump the call volume in HIG really picked up and my guess is that a lot of people are stuck in these lotto tickets, not realizing these kind of rumor chases occur each and every day, and 7 times out of 10, if you are not out within 30 minutes, you are going to lose.

75,667 HIG calls traded today, around 15X average volume. Considering we had rumors earlier this week with XL Capital (XL) and Lincoln National (LNC) it seems like the chase is on with the insurers, and I sincerely doubt all three will be bought out by next Friday, which is the only chance a ton of call holders have after following the media coverage, not realizing the real "smart money" was already in these trades and are the ones selling to you.

The SEC is so far behind and is unlikely to do anything unless HIG actually is bought out, which I hope happens, so we can see some justice.

I am in no way claiming that any of the guys from OptionMonster made the trade as I think they are smarter than that, and doubt they are in desperate need of a quick score, but something is definitely wrong with having this every day occurrence the misleads the public. Having the CNBC audience get all giddy and jump into options positions on takeover chatter that almost never results in an imminent deal is a serious problem, as the general trading public is unaware of what really happens behind the scenes.