VW Vol Pop Has Option Dealers Crying Foul

A large buyer of both listed and over-the-counter short-dated Volkswagen options pushed implied volatility on the name up 5% from 25% to 30% in two days--a spike that had traders calling for an investigation by U.K. regulators.

  • 23 Sep 2005
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A large buyer of both listed and over-the-counter short-dated Volkswagen options pushed implied volatility on the name up 5% from 25% to 30% in two days--a spike that had traders calling for an investigation by U.K. regulators. The reason for the uptick in vol could not be determined, but traders said it seemed to be connected to reports late in the week Kirk Kerkorian is preparing to take a stake in the firm, and also large stock buying. There was no suggestion Kerkorian is behind the trades and the activity also did not seem to be linked to an announcement from VW Friday morning it is considering the sale or stock disposal of two subsidiaries.

"It looks like someone knows something the rest of us can only guess at," said one trader. The buying frenzy was probably exacerbated, he noted, by other players jumping on the bandwagon without stopping to ask why the stock price and implied volatility--normally uncorrelated--were both rising. On Wednesday, according to a Citigroup report, there was a buyer of about 25,000 Oct. listed calls, worth about EUR3 million in premium and representing 2.5 million shares. Traders said the volume traded in the listed market was dwarfed by the OTC activity. Similarly, in the cash market, volume of stock traded reached 20 million for Wednesday and Thursday, compared to an average of 2.5 million over the last year.

Traders and strategists were puzzling over the rationale for buying up the upside calls, but discounted a corporate hedge because it was unlikely VW or another firm preparing a bid or disposal would have required this volume of option buying. VW treasury officials did not return calls by press time. "EUR3 million is a lot of premium to spend, and it's very strange that so much went through so quickly," said a City trader. "I would like to see an investigation," he added, noting because most market makers are now short options this call will likely be taken up.

One hedge fund manager, however, said he thinks insider trading is rife in equity markets, but very hard to prove. Even though the situation looks fishy, he said, the Financial Services Authority will be hard pushed to do anything about it.David Cliff, spokesman for the FSA, declined comment on the specifics of the case, but noted the regulator monitors U.K. markets daily for any untoward activity that may constitute abuse. A lawyer explained under the European Market Abuse Directive, the FSA can impose unlimited fines for insider trading, and it can also start criminal prosecutions against individuals and firms. The FSA would still have jurisdiction in the case, even though VW is a German firm, because the trading took place in London, he added.

  • 23 Sep 2005

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 415,838.72 1590 9.03%
2 JPMorgan 379,647.36 1732 8.25%
3 Bank of America Merrill Lynch 359,324.90 1302 7.81%
4 Goldman Sachs 267,102.04 920 5.80%
5 Barclays 266,010.35 1070 5.78%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 HSBC 45,073.36 191 6.67%
2 Deutsche Bank 37,312.62 138 5.52%
3 BNP Paribas 36,204.20 208 5.36%
4 JPMorgan 34,040.23 112 5.04%
5 Bank of America Merrill Lynch 32,958.96 107 4.88%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 22,398.41 104 8.67%
2 Morgan Stanley 19,092.40 102 7.39%
3 Citi 17,768.49 110 6.88%
4 UBS 17,693.89 71 6.85%
5 Goldman Sachs 17,256.05 98 6.68%