UPDATE: Icahn's Clorox Bid Yields Large Options Gains Friday

Activist investor Carl Icahn's bid for Clorox Co. (CLX) resulted in sizeable paper profits Friday for unusual stock-options trades that took place early this week.

The large trades turned heads in the options market when they hit the tape Monday. That's because the July-expiry call options were an especially risky bet. They would have dwindled to zero by the close of trading Friday without a big jump in the stock. There was no Clorox news Monday.

The options' value surged Friday after word of Icahn's $10.2 billion bid for the consumer-products company. As the stock jumped, the price of some of the options contracts rose to as much as 31 times the Monday low. Clorox shares closed with a gain of $6.12, or 8.9%, to $74.55.

The identities of traders behind activity in the options market tend to be closely held by market makers and others in the market.

"Call that a big win," said Etai Friedman, head of equity derivatives trading at MKM Partners. "The timing was uncanny, but the [rumors] had been out there circulating for many weeks," Friedman added.

In a letter to Clorox Chief Executive Donald Knauss, Icahn--who said his stake is now 9.4%--encouraged a go-shop process where the company would have the opportunity to entertain other bids. He said possible strategic buyers for the company might include Procter & Gamble Co. (PG), Unilever NV (UN), Colgate-Palmolive Co. (CL) and Kimberly-Clark Corp. (KMB), among others.

The options market routinely plays host to highly speculative trading on buyout rumors. Risk-taking participants use the contracts -- which convey the right to buy or sell shares at a fixed price over set times frames -- to bet for or against various takeover scenarios. Most don't play out.

It was the especially short time frame for this week's Clorox options bets that struck some analysts.

The value of options contracts that aren't profitable, or "in the money," falls as their expiration date approaches. They reach zero at expiry.

Call options to buy nearly 460,000 shares at $70 by Friday's close changed hands on Monday. The activity was scattered in blocks of 50 to 201 contracts, each of which grant the right to buy 100 shares. Prices ranged from 15 cents per share to $1.60, but leapt as high as $4.73 Friday.

One block trade of 50 contracts that cost $5,000 Monday surged to $45,000 Friday, a ninefold profit in four days. Most traders did not book profits on the bulk of the profitable $70 contracts.

Monday's activity in Clorox call options was spread across five different options exchanges.

"Either they knew what was going to happen, or they piled in [after] whomever had started to buy the options for speculative positioning," said Caitlin Duffy, options analyst at Interactive Brokers. "I would say more that Monday's trading raised an eyebrow."

A spokeswoman for the Securities & Exchange Commission declined to comment on the activity. A spokeswoman for the Options Regulatory Surveillance Authority said the agency reviews unusual trades on a regular basis but does not comment on any specific instance. Representatives for the five options exchanges declined to comment, with some adding they also review unusual trading as a routine practice. Representatives of Icahn Capital LP did not immediately comment.

As the value of Clorox's bullish call options surged Friday, bearish put options conveying the right to sell shares by the end of Friday's trading plunged. Puts to sell the shares at $70 fell from $1.50 on Thursday to a nickel in Friday's session.

"There's going to be a lot of pain for those that were short [with] options," said Patrick Mortimer, director of options trading at Pipeline Trading Systems LLC.

Monday's action was the highest single-day trading activity in Clorox call options since October. Friday's post-Icahn call action was three times Monday, and the highest since April 2010, Trade Alert data showed.

-By Brendan Conway, Dow Jones Newswires; (212) 416-2670; brendan.conway@dowjones.com

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