Fishy Dealings in Trane Options

Trane is one of those invisible companies which is also omnipresent: it has

operations everywhere from the Statue of Liberty to the Kremlin, and has even

found its way into Portfolio’s offices in Times Square. It’s just been bought

for $10 billion, amidst lots of questions about possible

insider trading: nearly 45,000 call options were traded Friday, compared

to just 3,448 options traded in the entire month of November.

It’s certainly true that anybody buying those call options is likely sitting

on a very nice profit today. But what about the dealers who sold the

options? Didn’t they smell a fish? After all, options are a zero-sum game: for

every winner there’s a loser. And given the suspicious spike in volume on Friday,

I’m surprised the market-makers didn’t just close down the market after a while.

Or are they not allowed to?

How much money are we talking about here? Well, each option is (I think) on

100 shares. So if 45,000 options traded hands at a strike price of $40, that

would give the buyers the option to buy $180 million of shares at $40 each.

Those shares are now trading at $46, which corresponds to a profit of roughly

$27 million, minus the amount paid for the options. That’s big money for an

individual speculator, but it’s not going to break the bank at a broker.

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