Talisman Buzzing with Options Activity

There has been no shortage of business media buzz around Carl Icahn (famous investor and businessman) over the last year. While he has a long history as an activist investor over the last 30 years, his bold move on Herbal Life has made him an outright celebrity. For those not familiar with the story, Bill Ackman (an American hedge fund manager) started a bold campaign to destroy Herbal Life by claiming that it was a ponzi scheme. As the stock was being decimated during the public smearing, Carl Icahn stepped in and bought a substantial stake in the company reversing its fortunes and publically shaming Ackman. This really brought him to the forefront.

Later in the summer Carl Icahn announced that he bought a very significant stake in Apple shares claiming that it was undervalued. His very mention of his position caused the stock to rally over 10% within days. The public investor has now been trained that following Carl Icahn’s investment positions is a profitable strategy.

With that in perspective, there was no shortage of market buzz when Icahn announced that he bought a 6%, 61,000,000 share stake in the Canadian energy giant – Talisman Energy (TSX:TLM). The stock had a material 10 trading session advance rising from $11.25 to a peak of $13.83 when the announcement was made. You can read the CBC news article for more details.

What we are interested to point out was a significant block order of 10,000 November 12.50 put options crossed yesterday. Clearly an institutional investor or money manager is using the news as a reason to take a significant interest in Talisman. The 10,000 puts represent a 1,000,000 share play on the stock at the $12.50 strike. The option was transacted at $0.48. While we cannot definitively identify if the investor was the buyer or seller, the fill price was below the trading spread which has us suspecting that someone sold the puts naked vs. having bought the puts as protection or a downside bet.

If our assumption is correct, the investor/manager has chosen an interesting way to play the stock. There is a dubious history to emotionally chasing a stock on hot news, which usually has prudent investors wait until the dust has settled. In this case if we are right about this being a naked put position, the investor has created a situation to take advantage of the new found attention that Talisman is receiving. The sell side investor has an obligation to buy Talisman shares at $12.50 over the next month. Having collected a $0.48 premium, the average cost base on an assignment would have been $12.02 which is $1.81(13%) lower from its peak price of $13.83. If the stock does not close below $12.50 by the November expiration, the investor will make $480,000.00 income (3.84%) for having taken the risk. Not a bad proposition if you believe that Carl Icahn has been able to turn the tide on investor sentiment for Talisman. Let’s watch over the next month if the stock price holds the $12.50 line.