It seems that someone got very lucky just before the bad news hit at BMS (see the April 4 posting below.) That's one explanation, and I hope that whoever it was is ready to defend it.

Today's Wall St. Journal reports that the day before the profit warning, some serious option transactions took place in BMS. Ten minutes before the close, orders came in to buy thousands of put contracts, at strike prices of 35 and 40. This was a most unusual spike in volume.

For those who aren't into options, that was a heavy bet that the stock price would fall. Option contracts have a built-in time limit. Each contract gave the holder the right to sell BMS stock at a set price ($35 per share for some of them, $40 per share for the others) at any time before April 20. When those were bought, the stock was at 37, so the right to sell at 40 for the next three weeks is worth at least $3 (the instant profit you could make by buying the stock and selling it at your locked-in price.) In practice, it's worth that $3 plus some extra premium. That extra depends on how long the option's good for and how volatile everyone thinks the stock will be.

Meanwhile, with the stock at 37, the right to sell at 35 isn't worth too much - just the premium based on the chances everything thinks it might have to actually go that low in the time remaining for the option. The only reason you'd buy an "out of the money" option like that is if you expect the stock to drop below 35 in pretty short order. At the very least, even if you don't believe that personally, you must think that a lot of other people are going to believe it, and soon.

Of course, this little transaction (which at its peak value could represent the selling of about 37 million dollars of stock!) paid off very well indeed. BMS promptly closed at about 32 the next day, and has dipped below 30 since. Those options have returned many times their original worth (although it's hard to tell if they're still being held, or held by the original buyers.)

This is the transaction for someone who's not satisfied with a measly 15% overnight profit. They want an overnight 500% to make it worth their while. Accordingly, option trades are one of the first things the exchanges (and the SEC) look at when there's a sudden move in a company's stock. It's like waving a red flag that says "Investigate me!"

I'd hate to have to explain how I got so darned lucky all of a sudden. Good luck to whoever placed these trades. You'll need it when they knock on your door.