Sony Stock Pops; Inside Information Cheater In The Option Market?

SONY CORPORATION (SNE) mainly involves the electronics, game, entertainment and financial operations. Consumer Products Service (CPS) segment offers liquid crystal display (LCD) televisions, cameras, audio and video equipment, personal computers (PCs), personal navigation systems, game consoles and software. Professional Device Solution (PDS) segment offers audio, videos and monitors for broadcast and commercial use, image sensors and other semiconductors, optical pickups, batteries, data recording media and systems.

This is a timely article given what I just posted back on May 7th (i.e. a week ago exactly):

Are Options Used to Cheat on Takeovers Using Insider information? Yeah, I think so... But Let me Prove it.

Back to that later.

For now, here's the news driving SNE stock (the headline):

Source: Yahoo! Finance: Sony Stock Soars As Hedge Funder Dan Loeb (Politely) Demands Change

The "change" is a spin-of of Sony's entertainment business. "Loeb said the proposed spin-off of a unit that is home to artists such as Beyonce and Adele and produced movie franchises like "Iron Man" and "Spider-Man" could add another 60 percent to Sony's stock price." (Source: Reuters).

But, the news isn't the news, the news is the trading before the news. SNE averages 8,331 contracts traded a day (over the last three-months) with 5,175 calls and 3,155 puts.

Tuesday, the company saw over 43,000 options trade. I have included the options montage from Tuesday below.

I've highlighted the Jun 19 calls and the Jun 17 puts (see the green numbers -- those are volumes on the day). Basically, ~10,000 of those calls were purchased for ~$0.80 and 9,000 of those puts were sold @ ~ $0.25. So that's a $0.55 debit to own ~9,000 Jun 17/19 risk reversals sell puts/buy calls. And then... yesterday happened.

I have included the options montage from yesterday, below.

We can see the risk reversal is now worth ($2.50 - $0.15) = $2.35. So, that would be a $2.35 - $0.55 = $1.80 gain x 9,000 contracts = $1,620,000 gain on an initial $495,000 bet; aka a 330% gain in half a day.

I get asked often if I think "every time" this type of situation comes up if it's insider information used for ill-gotten gains. My answer remains consistent; if you take out known events (earnings, FDA "stuff", etc), and you see 10x average option volume (or whatever) that yields 300%+ one-days gains (or whatever) then yes, basically "every time" it's a cheater. Now is it possible that some astute traders see this unusual volume and piggy-back (i.e. copy the order flow)? Yes, it is. And that is legal. But that doesn't detract from the reality that the initial catalyst was illegal trading.

Now the words "every", "always", "never", etc. are generally not true. So I won't say every time (mostly b/c I don't want to respond to 3,000 comments) -- but you get the idea... I hope...

The idea is... "Cheater."

Now, there is a huge caveat to this one -- the meeting with management did happen over the weekend... Not sure why there was a delay in the reaction... Full disclosure...

Disclosure: This is trade analysis, not a recommendation.

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