After the close Friday the newswires reported that the FBI was in the process of investigating legendary hedge fund investor Carl Icahn, a famed Las Vegas gambler and of all people, pro golfer Phil Mickelson for suspicious trading in Clorox prior to Mr. Icahn’s unsolicited bid for the company in July 2011. The chart of CLX stock performance in 2011 reveals the sequence of events.
First on February 11, 2011, filings reveal that Carl Icahn had amassed a 9.1% stake in CLX and had become the largest shareholder.
On July 11th, CLX’s stock price has a very wide intraday range (stock going from $68 to an intra-day high of $72) with a subsequent spike in volume in the stock (5x avg daily volume) and options (50x avg daily volume), with the most active options the July 70 calls and the July 72.50 calls that expire in 4 trading days on July 15th.
On July 14th, after the close, Carl Icahn makes an unsolicited $76.50 a share offer for CLX in a letter to management (here) and the stock went from its July 14th close of $68.43 to a $74.55 close on expiration. The July 70 calls, many of which were bought on Monday July 11th for less than 50 cents were worth more than $4 for most of the day, an 8 fold return in 4 trading days.
The trading on July 11th is obviously suspicious, as buying out of the money calls in a stock like CLX with 4 days to expiration has a very low probability of success without an identifiable catalyst. Someone knew something as CLX was not set to report Q2 earnings until early August.
The details of the investigation are still murky. News reports in the Wall Street Journal followed by others suggested that federal investigators were looking into whether Icahn gave information to sports gambler William Walters, who later gave information to Phil Mickelson regarding Icahn’s planned unsolicited bid. Icahn called the report by the WSJ “completely irresponsible” and pointed to his unblemished record over the past 50 years as evidence that he does not condone or engage in any sort of insider trading himself.
Whatever the details, we have often pointed out that options activity can sometimes be a signal of potential activism in a stock. We get particularly interested when the strikes chosen are either short-dated or far out of the money, and the size traded is abnormally large relative to normal volume.
For example, we noticed unusual far out-of-the-money call activity in EBAY last November, and posted our thoughts on those options prints:
But a couple weeks ago there were rumors that Carl Icahn has taken a stake, just a rumor, and then today there was some fairly curious bullish options activity, on a day that saw the stock make new 52 week lows.
Just a bit ago a trader bought 50,000 July 62.50/65 Call Spreads paying .275, that trade breaks-even at $62.775 on July expiration, up 28% from current levels, which would also be about 6% above the all time highs made in 2005.
If you were inclined to agree that activists could have a field day with this company, this is not the trade that you would put on to get long exposure as it has a very small delta. But you would put this trade on to add leverage to a stock position if you thought a rip your face off activist like Dan Loeb, or Carl Icahn were involved and gonna shake stuff up… hell, if I were those guys and I was building a long stock position this also exactly the sort of leverage I would add the position.
It’s rare that the options trading makes it that obvious, but the current investigation has the potential to further reduce this sort of activity by traders in the options market. Everyone will certainly thinking twice before playing to get ahead of an activist announcement, especially since activists have gotten busier over the past couple of years.