Option Greeks, Insider Trading, and the Heinz Acquisition

Abstract

Just before Warren Buffett's company, Berkshire Hathaway Inc, acquired H. J. Heinz Company on February 14, 2013, rumors had been circulating that the Omaha investing oracle had set eyes on the condiment giant. By the time the official acquisition was announced, questions had arisen about some unusual trading activity in financial markets. A very profitable trade was made on the option market just a few days before the announcement: a $90,000 trade that resulted in profits of around $1.8 million. The case puts students in the shoes of a fictional SEC analyst in charge of investigating rumors of insider trading in the context of Berkshire Hathaway's acquisition of Heinz. Which market would an informed investor with limited capital choose? Which option contract would the insider choose, and why? The case allows the instructor to introduce option “Greeks,” measures of sensitivity of option contracts to underlying risk factors. The Greeks are presented in an intuitive fashion, and the analysis provides an applied, true-to-life setting to a topic that students often consider very abstract.

Excerpt

Rev. Feb. 7, 2022

Option Greeks, Insider Trading, and the Heinz Acquisition

Just before Warren Buffett's company, Berkshire Hathaway Inc (Berkshire Hathaway), acquired H. J. Heinz Company (Heinz) on February 14, 2013, rumors had been circulating that the Omaha investing oracle had set eyes on the condiment giant. By the time of the official acquisition announcement, questions had arisen about some unusual trading activity in financial markets.

Ana Barre was one of the people who suspected that there might be something unusual going on. She had received a tip that illicit trading might have taken place in the option market surrounding the Berkshire Hathaway–Heinz acquisition. She was an analyst with the US Securities and Exchange Commission (SEC) Market Abuse Unit team, so it was her duty to investigate. With years of experience, however, Barre was never quick to declare illegal gains without overwhelming evidence. She knew there were countless perfectly legitimate investment strategies that could explain the bets that investors had made. Investors routinely employed trading strategies that combined stock and options to create payoffs that precisely fit their investment theses. Derivatives markets also allowed them to take a lot more risk and make more of a return, thanks to the leverage naturally embedded in derivative contracts.

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Keywords: options, Greeks, insider trading, Berkshire Hathaway, 3G Capital, Warren Buffett, Heinz, M&A, mergers and acquisitions, SEC, derivative contract, derivatives, takeover, stock, put-call, arbitrage, Black-Scholes, option pricing, Terpins