Incredibly “Insightful” Trader Pockets $10M on a $22k Investment
Image courtesy of 123rf.

Incredibly “Insightful” Trader Pockets $10M on a $22k Investment

A positive black swan market event transpired on Thursday.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Defying all historical profitability metrics, an unknown investor hit a massive jackpot that yielded a 45,650% return on their investment. Strangely enough, this happened in the traditional stock market. 

Typically, such astronomic gains occur in the crypto market due to novelty, volatility, and global permissionless access. What set the conditions for this monstrous performance?

Cisco’s Splunk Acquisition

On Thursday, Cisco Systems (CSCO) announced the acquisition of Splunk (SPLK). The staple software company specializing in networking products and services bought Splunk to boost its cybersecurity division at $157 per share in cash. This makes the deal worth $28 billion, Cisco’s most significant acquisition to-date, as 13% of the company’s market cap.

The day closed with CSCO shares going down 4.5%, while SPLK shares went up 22%, from $117 to $145 per share at press time. The deal is set to be finalized in Q3 2024. The two companies go hand-in-hand, as Splunk specializes in broad data collection that can be utilized to detect patterns/anomalies thanks to machine learning algorithms. 

This would fortify Cisco’s range of networking products, from the Meraki cloud platform to ASA firewalls and DNA Center for network management.

“Our combined capabilities will drive the next generation of AI-enabled security and observability,”

Chuck Robbins, Cisco CEO

In the tech arena, Cisco has been lagging behind the benchmarks. Compared to the Technology Select Sector SPDR Fund (XLK), Cisco’s year-to-date gains are lackluster, at +12.6% vs. XLK’s 32.8%, likewise when stacked against Nasdaq 100 (NDQ) index, which is at +36.5% for the same period.

Therefore, Splunk is Cisco’s historic bet to become the networking leader. Much of this relies on integrating Splunk’s tech into Cisco’s full networking stack, Agile Networks. Per Cisco’s last earnings report, Agile Networks’ revenue increased by +33% to $8.125 billion year-over-year.   

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The Exceptionally Anomalous $10M Options Trade

First brought to the public spotlight by @unusual_whales, the 45,650% ROI revolves around derivatives trading.

The investor opened 127 calls on Splunk (SPLK) stock. This type of option contract gives the trader the right to buy the stock at a specific strike price and expiry date but without obligation. The underlying call gambit is bullish:

  • One believes the stock will go up.
  • Based on this belief, one buys an option contract, setting the stock at a present lower strike price.
  • When the stock goes up, the contract can be exercised, with contract holders pocketing the difference between the new stock price and the contract’s lower strike price.
  • This itself boosts the contract’s value, expressed as premium – the additional amount of money buyers are willing to spend to secure the right to buy the stock at the previous lower price. 

If that right is not exercised, call options would simply expire, leaving the trader with the cost of the contract’s premium, which is the price for the right to be exercised. In this case, 127 calls were priced at $0.04 on Thursday, totaling $22k in premiums and expiring on Friday.

Image courtesy of @unusual_whales

On Friday, after the Cisco-Splunk acquisition took the public spotlight, the contracts were priced at $18.30. This one-day drastic increase made for a 45,650% ROI. Once the trader exited the position, the initial $22k investment transformed into a $10,043,000 profit.

SEC’s Scrutiny Inevitable?

This was a textbook options gambit. As if the investor knew beforehand that SPLK demand would go up. Therefore, other investors would be willing to pay a higher premium for call options on a rising SPLK stock. 

Just as the profit is astronomical, the same could be said for the odds of such foresight appearing accidentally. The giveaway is in the timing, as the contracts’ expiry date is in sync with the Cisco-Splunk acquisition announcement. 

It is very likely that the Securities and Exchange Commission will launch an investigation given the trade’s highly public and anomalous nature. To date, the SEC issued a record insider trading fine, at $1.8 billion, to SAC Capital Advisors in 2014, founded by Steven Cohen.

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Do you think some Cisco/Splunk employees, or their friends, took advantage of the deal? Let us know in the comments below.