Pre and After Market Trades

[Gundini]

I am hoping one of you learned Forumites may be able to explain the meaning of these following Pre Market trades on BHP.

The Close yesterday was 25.32
Open this morning was 25.50

Bellow are the Pre Market Trades this morning. This is only a small sample, but you will get the drift. In the space of 6 seconds this sample traded between 28.50 and 33.00

Is this BHP buying its shares back, and if so, or whoever it is, why such high prices? And who are they buying them off at those prices, Institutions?

Time Price Quantity

7:05:55 AM $33.000 10,000
7:05:55 AM $33.000 1,000
7:05:55 AM $33.000 4,000
7:05:55 AM $33.000 3,000
7:05:55 AM $31.000 1,000
7:05:54 AM $31.000 3,000
7:05:54 AM $31.000 1,000
7:05:54 AM $30.500 5,000
7:05:54 AM $30.500 1,000
7:05:54 AM $30.500 2,000
7:05:54 AM $30.500 145,000
7:05:54 AM $30.500 10,000
7:05:54 AM $30.500 27,000
7:05:54 AM $30.000 1,000
7:05:53 AM $30.000 2,000
7:05:53 AM $30.000 1,000
7:05:53 AM $30.000 6,000
7:05:53 AM $29.500 1,000
7:05:53 AM $29.500 47,000
7:05:53 AM $29.500 2,000
7:05:53 AM $29.500 2,000
7:05:53 AM $29.500 1,000
7:05:53 AM $29.500 2,000
7:05:52 AM $29.500 4,000
7:05:52 AM $29.500 1,000
7:05:52 AM $29.500 3,000
7:05:52 AM $29.500 17,000
7:05:52 AM $29.500 14,000
7:05:52 AM $29.500 33,000
7:05:52 AM $29.000 8,000
7:05:52 AM $29.000 21,000
7:05:52 AM $29.000 5,000
7:05:52 AM $29.000 1,000
7:05:51 AM $29.000 4,000
7:05:51 AM $29.000 3,000
7:05:51 AM $29.000 1,000
7:05:51 AM $29.000 1,000
7:05:51 AM $29.000 1,000
7:05:51 AM $29.000 6,000
7:05:51 AM $29.000 2,000
7:05:51 AM $29.000 1,000
7:05:50 AM $29.000 2,000
7:05:50 AM $29.000 15,000
7:05:50 AM $29.000 7,000
7:05:50 AM $29.000 7,000
7:05:50 AM $29.000 6,000
7:05:50 AM $29.000 48,000
7:05:50 AM $29.000 6,000
7:05:50 AM $28.500 3,000
7:05:50 AM $28.500 36,000
7:05:49 AM $28.500 9,000
7:05:49 AM $28.500 3,000
7:05:49 AM $28.500 2,000
7:05:49 AM $28.500 77,000

 

[x2rider]

BIL - BHP Billiton Plc - Notification of Transaction in Own Shares
BHP Billiton Plc
Share code: BIL
ISIN: GB0000566504
Date: 19 December 2006
BHP BILLITON PLC - TRANSACTION IN SHARES
BHP Billiton Limited announces that on 19 December 2006 it purchased 1,325,000
ordinary shares of BHP Billiton Plc at an average price of 929.73 pence per
ordinary share.
Following the above purchase, BHP Billiton Plc holds 25,420,000 of its ordinary
shares as treasury shares and BHP Billiton Limited holds 64,035,000 of the
ordinary shares in BHP Billiton Plc, for a total of 89,455,000 shares. The total
number of BHP Billiton Plc ordinary shares in issue (excluding shares held as
treasury shares and shares held by BHP Billiton Limited) is 2,378,692,002.
Hope that helps

 

[wayneL]

Looks like option exercise to me.

The higher prices would be ITM put assignments.

 

[Gundini]

Looks like option exercise to me.

The higher prices would be ITM put assignments.

ITM put assignments, excuse my ignorance, maybe put options? No, because put options would be lower prices right? Could BHP be buying back institutional Call options? Is that possible? But why would they come through as trades, when normally only stock purchases are posted in depth charts I thought, dont options have their own exchange? Am I making any sense or just confused.

Those prices seem meaningless to the underlying share price, should I just ignor after market trading?

I got a lot to learn

Thanks x2rider

 

[wayneL]

ITM put assignments, excuse my ignorance, maybe put options? No, because put options would be lower prices right?

No. Only put options with strike prices higher than the share price will be exercised. This is where the financial benefit is. i.e. sell for a higher than market price

Could BHP be buying back institutional Call options? Is that possible? But why would they come through as trades, when normally only stock purchases are posted in depth charts I thought, dont options have their own exchange? Am I making any sense or just confused.

Correct, buying back call options would not appear as share transactions at all

Those prices seem meaningless to the underlying share price, should I just ignor after market trading?

Yes, meaningless. The clue is in the nice round numbers eg, $30.00 $30.50 etc. and in the volume being in nice even 000's You can be almost sure these are option exersizes.

Cheers

 

[Gundini]

Thankyou wayneL, you are very knowledgable, cheers, so what if anything positive would you glean from these options, round numbers etc in your experience?

 

[sails]

With the exception of 2 x $24 calls (2,000 shares) all those other transactions listed around 7.05am this morning were put exercises (indicated by course of sales CondCodes as "EP"). This is not uncommon for ITM options to be exercised, especially with option expiry tomorrow.

BTW Gundini - option strikes usually use round numbers unless there have been adjustments to the underlying share - so no special significance with these round numbers.

 

[Gundini]

Looks like option exercise to me.

The higher prices would be ITM put assignments.

Ok, have done some research and come up with this:
(With Googles help of course)

An ITM put option has a strike price above the current price of the stock. So, all strikes from $25.32 (Yesterdays Close) and higher are ITM. (In the money)

If BHP sell the $33 ITM strike put option for $7.24, they are almost assured of being assigned the put options. This means that they will be forced to buy XXX shares of BHP at $33/share if BHP ends up below $33/share on options expiration day, which in this instance is March 07.

Why would they want to buy BHP at $33 when it's trading at $25.32 today? Because they are getting $7.24 per option contract up front, which lowers their cost basis to $25.76/share ($33 strike price - $7.24 = $25.76). So, providing the share price goes above $25.76/share, and stays below $33.00/share by March 07, they would actually be buying shares XX cents lower than their current future trading price.

Therefore, for the exercise, as long as BHP stays below $33 through the March 2007 option expiration, BHP can count on being assigned the shares below "book value." That's because they would be buying XXX shares of BHP at $25.76/share cost basis.

So if on 31st March 2007, BHP's actual share price is $32.50 say. BHP would be assigned XXX shares @ $25.76, representing a discount of $6.74/share

Plus they get the $7.24 option price up front to deposit in their account, which will start to earn interest from December 06 through March 07.

This seems like a great safe trade and very profitable. So basically, this is a bullish play for BHP. They think the stock price will go up otherwise they wouldn't make the trade!

Is my understanding correct?