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Insider Activity Ahead of AT&T-LEAP Deal Should Raise Red Flags

Yahoo! Finance
The Exchange

By Jon Najarian

Do you remember when comedian Steve Martin asked his audience, "How do you get rich? First, start with a million dollars!" Well, apparently the other way to get rich for some is to trade on insider information.

We highlight this time and time again at Optionmonster and on our premium subscription services, and it never ceases to amaze me how often we see what our forensic team calls "unusual activity" ahead of events like takeovers, FDA approvals or rejections and new product introductions.

Obviously, someone, and in many cases many someones, are made aware of very valuable facts, and all too often the temptation to trade on this information is simply too great. I believe the data I present below suggests that someone did indeed act on the AT&T (T) takeover of LEAP Wireless (LEAP) and made several million dollars in the process.

The Setup

Average daily call activity in LEAP Wireless was about about 500 contracts. That's not much; barely enough to keep the options listed. Well, on Friday we saw rapid accumulations of call options (which give the owner the right to buy shares at a specific level, for a specific period of time), with the August 9 calls trading nearly three times (1,438 contracts) the full session average of 500 contracts.

Our HeatSeeker noted July and October calls also much more active than normal and trades equally suspicious.

July 9s traded 1,284 contracts, October 8s trade 1,187 contracts.

In the case of the August 9 calls, calls bought for $.09 just 20 minutes before the bell EXPLODED to a value of $8 as shares trade $17 post the AT&T takeover. That's near 89 times the invested dollars, but likely will land the buyer in trouble!

Just that one strike (July 9 calls) trading 1,438 contracts made the owners of same a cool $1,150,000 as each option is for 100 shares and thus 100 x 1438 x 8 yielded a total of $1,150,000.

Similar profits in October 8 and August 9 calls suggest profits topping $3 million on these trades, each of which was multiple times the normal daily activity traded in LEAP Wireless call options.

I guess Benjamin Franklin's advice is as true now as in the 1700s: "Three can keep a secret, if two of them are dead."

Najarian is the co-founder of optionMONSTER, which occasionally competes with Thomson Reuters in providing real-time market information.