Quick and huge profits made in Dow Jones calls

Some of Best Bets
Added Monday,
Before News of Bid

By Mohammed Hadi
The Wall Street Journal
Tuesday, May 2, 2007

Some option traders found themselves sitting on massive profits in positions on Dow Jones & Co. after word that News Corp. has offered to buy the company.

But the fact that some of the most profitable positions were added as recently as Monday, before news of the $60-a-share offer for Dow Jones broke, had some in the options market crying foul. News Corp.'s offer was made in a letter sent before the Dow Jones annual shareholder meeting April 18.

A spokeswoman for Dow Jones declined to comment.

Option traders have been positioning for a big gain in Dow Jones shares throughout April. During the month, more than 10,000 call options on the stock changed hands, compared with about 7,000 during the entire first quarter. The gains they were hoping for came yesterday as shares of Dow Jones rose $19.87 to $56.20 in 4 p.m. composite trading on the New York Stock Exchange.

The move left some option traders with enormous profits. For example, on Monday with Dow Jones shares trading around $36, traders snapped up call options that give them the right to pay $45 for the stock in the coming months. More than 3,400 of the September 45 calls changed hands during the session, which was the first time these traded at all in almost three months, according to Track Data.

Yesterday, as the stock surged, these positions rose to $12 from 35 cents -- a more than 33-fold return.

Several large private-equity deals in the last year were preceded by heavy trading in call options.

Still, the fact that traders targeted call options that don't expire for several months, which are more expensive than those that expire in a few weeks, is a clue that they might not have known when the stock move would occur, said Michael Schwartz, chief options strategist at Oppenheimer & Co.

Traders yesterday were busy positioning themselves in shares of Dow Jones and other newspaper companies such as New York Times Co. and Gannett Co. -- stocks that also rose.

Some turned to put options that will profit if these stocks fall back, while others took the opportunity to speculate on more gains to come -- ostensibly anticipating a higher bid in the case of Dow Jones, said Paul Foster who tracks options trading for theflyonthewall.com.

* * *

Join GATA
at the
World Gold, PGM, and Diamond Investment Conference
in Vancouver, British Columbia, Canada
Sunday and Monday, June 17 and 18, 2007

http://www.cambridgeconferences.com/ch_june2007.html

* * *

Help Keep GATA Going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at www.GATA.org. GATA is grateful for financial contributions, which are federally tax-deductible in the United States.