Well-timed bullish option bets seen in Digital River weeks before deal

Reuters News
Posted: Oct 24, 2014 3:03 PM

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - Well-timed bullish options bets on Digital River Inc <DRIV.O> were placed about two weeks before the e-commerce services company said on Friday it would be taken private.

Digital River's stock rose 48 percent to $25.75 on Friday, a day after the Minnesota-based company said it entered into an agreement to be bought by an investor group led by Siris Capital Group LLC for $26 a shares.

A fortnight before the deal was announced there was a sudden spike in options activity with nearly 28,000 calls traded between Oct. 6 and Oct. 13, according to options analytics firm Trade Alert data.

The average daily volume on Digital River from the beginning of the year till Oct. 6 was 36 calls, according to Trade Alert.

A lot of the call activity during these six days was in calls at the $18 strike set to expire on Nov. 22.

"A buyer stepped in on Oct. 8th and Oct. 9th and took the open interest from zero to 7,268 paying from 20 cents up to 90 cents. Those calls are now worth $7.50," Ophir Gottlieb, chief executive of Los Angeles-based Capital Market Laboratories LLC said.

While it is possible that all of the trades were a coincidence, Gottlieb does not think they were, he said.

There was also heavy volume in calls at the $16 strike that were set to expire on Nov. 22 and in calls at the $20 strike that expire on Dec. 20, according to Livevol Inc data.

The choice of strike prices, all at-the-money, indicates that somebody was speculating that some deal was going to take place, Travis McGhee, Vice President of optionMONSTER, said.

Not only did the volume on Digital River's options pick up sharply, it was also heavily skewed towards calls, Brian Overby, senior options analyst at online brokerage TradeKing in Charlotte, North Carolina, noted.

The put-to-call ratio for five of the six days was less than 0.05-to-1, Trade Alert data showed. A lower put-to-call ratio typically indicates a more bullish sentiment on the stock.

“It’s very rare for underlyings with options that have an average daily volume this low to have such a large skew in the put-to-call ratio,” Overby said.

On Friday, volume on Digital River's options was 11 times normal with 18,000 contracts traded by 2:30 p.m. EST. Calls at the $18 strike and expiring on Nov. 22 were the most active as investors appeared to be liquidating positions, WhatsTrading.com options strategist Fred Ruffy said.

Digital River did not immediately respond to a request for comment.

(Reporting by Saqib Iqbal Ahmed; editing by Andrew Hay)