<<<On April 8 RealMoney.com contributor Rebecca Engmann Darst published a column titled âOption Traders Expect a Slump in Small-Capsâ. In her column she discussed small cap retailer Overstock.com.
âThe mood of anticlimax extended to options of another small-cap stock, the online discount merchant Overstock.com (OSTK). Shares in the company rose 5% to $13.92 this afternoon on no apparent news catalyst, but a sixfold increase in option trading volume shows many traders taking the opportunity to stake bets on limp share-price movement heading into the hot season.â
Darst analyzed the trade data and opined that the trader had a âclear anticipation that the buck stops right about here for Overstock.comâ as the volume in the $12.50 Puts skyrocketed. At the time of the options trades the equity itself was trading near $14.00/share.
So how did this trader make out now that the trade is two-days old?
April 10th became the day that Gradient Analytics, under lawsuit by Overstock.com for colluding with short sellers to draft hatchet job analysis, filed a counter claim to the lawsuit filed by Overstock some 2+ years ago claiming Overstock libeled them.
The announcement of the countersuit dropped the market in Overstock.com $1.31 (9.28%) to a closing price of $12.81 after hitting an intraday low of $12.31.
Was this remarkable luck on behalf of this trader or was it more?
To think that a large short position, six times normal trade volume, is executed just days before this news is released is far too coincidental. The trading raising additional spotlight on the relationship between Gradient and the short sale community as this investment made was a short interest position taken.
With the spotlight squarely on the SECâs Division of Enforcement, Congress requesting yet another GAO investigation into the divisionâs policies and effectiveness, this incident will provide for a large contingent of public followers. The SECâs alliance with short sellers have come into question repeatedly as they muddle through short sale reforms and with the options market again being called into question the division will be expected to report out on how infiltrated the market is with fraud and corruption.
It will also be interesting to determine if, like Bear Stearns this six times rise in options trading bogged down the equity market with shares that would not and could not settle.
Did the potential crook use the market making exemption as the vehicle for the fraud where, had the SEC acted on the 2006 public proposal to eliminate such exemption those sales may never have been executed?>>>
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