M&A

11 November, 2009

UPDATE 1-Trades in 3Com, ahead of HP deal news, turn heads

* 3Com call option volume surges ahead of proposed deal

* 3Com $5 call options stand out as shares rise

* 3Com shares up 35 pct at $7.69 after the bell (Adds details of options trades, analyst comments, paragraphs 11, 15-17)

By Doris Frankel

CHICAGO, Nov 11 (Reuters) - A jump in 3Com Corp (COMS.O) shares and call options on Wednesday before a $2.7 billion offer for the company was announced sparked talk that the news had been leaked, option traders and analysts said.

Hewlett-Packard Co (HPQ.N) announced the deal to buy the network equipment maker after the closing bell on Wednesday.

At first glance, option traders said, the hallmarks of suspicious trading were there: shares of 3Com jumped 28 cents, or 5.18 percent, to $5.69 during the day, rising from the opening bell and closing a penny off the high of the day.

After the bell, 3Com shares shot up about 35 percent at $7.65.

Option market sources said it wasn't just the stock behaving oddly ahead of the late afternoon news. Volume in 3Com call options -- which convey the right to buy the company's shares at a fixed price within a specified time period -- soared.

A total of 8,085 calls traded against only six puts. That amounted to 17 times the recent average daily call volume, according to option analytics firm Trade Alert.

"The rise in 3Com shares and a surge in call volume before the takeover announcement tell us that somebody's timing was extremely good," said Jon Najarian, co-founder of optionMonster a Web information site.

"Since I do not believe in coincidences on Wall Street, I would bet that these unusual call option trades will spark an investigation," Najarian said.

The Securities and Exchange Commission, which looks into unusual options and share trading activity, was closed on Wednesday in observance of the Veterans Day U.S. holiday.

Options traders said the surge in 3Com call volume was focused in the November and December $5 calls, which convey the right to buy 3Com shares at $5 apiece.

The volume in both strikes far exceeded their contracts outstanding, indicating new positions were initiated.

"The unusual volume in the November and December $5 calls indicated a red flag and would be a sign that this news was leaked ahead of the announcement," said Jeff Shaw, head options trader at Timber Hill, a division of Interactive Brokers Group.

Frederic Ruffy, options strategist at WhatsTrading.com, said most of the trading in the $5 call strike occurred around noon Eastern time (1700 GMT), when 3Com shares were trading at around $5.60.

Ruffy said one trade for 3,800 November $5 calls was done at a premium of 65 cents per contract. The premium for those calls closed at 65 cents, up 10 cents on the day.

The December $5 calls were purchased for 75 to 80 cents apiece. The premiums for those calls ended at 85 cents per contract, up 20 cents from Tuesday.

If the transaction is completed as announced, both call contracts will end up valued at about $2.90, a gain of 346 percent for the November strikes and 263 percent for the December contracts, according to the optionMonster website.

Calls outpaced puts by a bullish ratio of 1,348-to-1. The fact that only a total of six puts traded also "indicated something was brewing in 3Com," said William Lefkowitz, option strategist at brokerage firm vFinance Investments. (Reporting by Doris Frankel; Editing by Gary Hill)

Source: http://www.reuters.com