Options Traders Knew Something Fishy At VeriFone (PAY)

We’ve already covered the reasons behind the monumental share price drop being seen at VeriFone (NYSE:PAY).  But what is interesting is that it really looks like the options traders must have known something horrible was coming.  If they didn’t know something wicked this way comes then they are the luckiest trades around.

We do not look at the trading in options after an event, but we do look closely at the open interest of options contracts.  Low and behold, the open interest in the near-month(s) PUTS are much greater than the open interest of the CALL options.

DECEMBER 21, 2007 EXPIRATION DATES:

• $45, $50, & $55 CALLS had 4,095 contracts in the open interest.
• $40 PUTS had 3,353 contracts in the open interest and $45 puts had 3,272 contracts in the open interest.

JANUARY 18, 2008 EXPIRATION CALLS:

• $40, $45, & $50 strikes all combined only had an open interest of 5,475 contracts.

JANUARY 18, 2008 EXPIRATION PUTS

• $30.00 strike 6,266 contracts in the open interest.
• $35.00 strike 5,080 contracts in the open interest.

When you consider the shares were north of $48.00 on Friday, you’d know that the put options at $30 and $35 were way out of the money before the news.  These might not be large enough to throw up major red flags after the fact, particularly since the shares had risen so much over the last 90 days.  But when you go back and look at the open interest after the fact, this stands out like a sore thumb.

We’ll be updating additional data on VeriFone in the coming days on our open email distribution list.  We never gave this much of a review for our subscriber-based Special Situation Investing Newsletter because the run-up had been too much and the valuations were excessive, but this may demand a more concise review for subscribers after the dust settles down here in the coming days to weeks.

Jon C. Ogg
December 3, 2007