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Spotting Big Profits by Following the Insiders

I hate to be the bearer of bad news, but hedge funds and banks trade on insider information all the time.

Spotting Big Profits by Following the “Insiders”

Macerich-Simon: 104%-plus Gain in a Few Days

Heinz-Kraft: One that Got Away


When I was a trader in the pits on the Chicago Board of Options Exchange (CBOE), I learned very early to stay out of the way of the smart traders at Goldman Sachs and Morgan Stanley. For example, when a Goldman Sacks broker came running into my pit screaming that he needed a market on XYZ calls, I figured that something was up. And more often than not, either later that day, or in the days to come, an upgrade on the stock or a bullish corporate action would be announced.

I hate to be the bearer of bad news, but hedge funds and banks trade on insider information all the time. It is a reality. So I try to level the playing field for my readers and follow into similar trades as these “insiders.”

Take for example a recent trade I recommended for the subscribers of Cabot Options Trader. I had never heard of Macerich (MAC). But my scanner picked up on unusual options activity and drew my attention to the stock.

This is the alert that I sent to my Cabot Options Trader readers:

Buy Macerich (MAC) April 85 Calls (exp. 4/17/2015) for $2.60 or less. I am not too familiar with Macerich (MAC). However this stock has seen extremely odd options trading for the past several weeks. On 2/20, a trader bought 5,000 March 90 Calls for $0.70. Then on 2/26, a trader bought another 4,000 of these calls for $0.40. And today, a trader bought another 4,000 for $0.55. These trades don’t make sense with the stock trading at 83 and only three weeks until expiration. This type of activity really grabs my attention. To execute this order, you need to: Buy to Open the MAC April 85 Calls. We were able to buy our calls for $2.50 shortly after my alert was sent.

So how did this trade work out? Here’s what I sent to my readers just four days later:

Macerich (MAC) Update: Potential Takeover It was reported last night that Simon Property Group (SPG) has made approaches to take over Macerich (MAC), which would combine the two largest shopping-mall owners in the U.S. This would clearly explain the extremely bizarre options trades that brought us into our MAC April 85 Calls position. MAC is bid higher by $5 in pre-market trade at $88.80.

In the days that followed, we sold half the position for $5.10 for a profit of 104%, and the second half for $7.40 for a profit of 196%.

These insiders won’t always be right with their large call and put purchases, and we get some trades wrong from time to time. However, my “order flow reading” trades in just the last two months have netted some big scores for both my options trading services.

For example, Cabot Options Trader subscribers recently gained 110% in Utilities ETF (XLU) puts, 21% in Applied Materials (AMAT) calls and 24% in (JD) calls.

And Cabot Options Trader Pro subscribers locked in 157% in the Utilities ETF (XLU) bear put spreads, 64% in an E*Trade (ETFC) diagonal spread and 24% in (JD) calls.

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--- I’ve been on a great streak lately, but I missed out on a giant score recently, too. Nobody’s perfect.

On Tuesday March 11, 2015, I included two trades from Kraft Foods (KRFT) in my Daily Watch List that I send to my readers every morning before the market open. Here were those trades:

Buyer of 3,500 Kraft Foods (KRFT) March 62.5 Calls for $0.40 Buyer of 10,000 Kraft Foods (KRFT) June 67.5 Calls for $0.70

As always, I kept tabs on the stock, and was waiting for another round of call buying. That second wave never came, and the 3,500 March 62.5 Calls expired worthless. Because of a lack of continued call buying and the shorter-dated calls expiring for a 100% loss, I took the stock off of my radar.

Then last week, it was announced that Heinz and Brazilian private equity firm 3G Capital would acquire KRFT. In reaction to this news, KRFT traded higher by 42% to 87.00.

The 10,000 June 67.5 Calls purchased for $0.70 were worth $19.70, or a profit of $19,000,000 in approximately two weeks. Time and time again time, my theory that traders use options to trade on insider information is proven true.

And with the assistance of my proprietary scanning tool, we can get an inside view of what we’re doing.

If you would like to learn more about options and how options trading can help you become a better investor, take a look at Cabot Options Trader. Click here to find out more about options and how you can try our advisory risk free for 60 days.

Your guide to successful options trading,

Jacob Mintz
Chief Analyst, Cabot Options Trader and Cabot Options Trader Pro

Editor’s Note. At Cabot Options Trader, I strictly use call and put purchases, and covered call/buy-write strategies. When I send a trade alert, I write out detailed instructions on how to execute the trade, as well as the risks.

At Cabot Options Trader Pro, I use every options trading strategy available, including vertical spreads, calendar spreads, iron condors and many more.

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.