By Andrea Shalal-Esa and Doris Frankel
WASHINGTON/CHICAGO (Reuters) - Lockheed Martin Corp <LMT.N> said on Wednesday that it could not explain the huge jump in trading in its stock options last week, hours ahead of the surprising news that its incoming chief executive had resigned after admitting to an ethics breach.
The remarkable spike in trading of bearish positions about two hours before Friday's closing bell - many times the volume typically traded in the defense company's options - is likely to raise red flags with regulators.
"To have such an extremely high day of put volume immediately in front of significant news is unusual and worth a closer look by security regulators," said Henry Schwartz, president of options analytics firm Trade Alert.
Jennifer Whitlow, spokeswoman for Lockheed Martin, said the company had "no knowledge of the reasons for the options trading activity that occurred on Friday, or who made the trades."
Christopher Kubasik, who had been scheduled to take the reins as Lockheed's CEO in January, resigned after admitting to an affair with a subordinate. Marillyn Hewson was named in Kubasik's place.
When the heavy trading took place, at around 2 pm ET on Friday, "Mr. Kubasik's resignation had not been tendered," Whitlow told Reuters in an email.
A total of 58,000 puts and 1,224 calls traded on Lockheed shares on Friday, 20 times the daily average, according to Trade Alert.
It was the highest put volume in the defense contractor in more than two years, data from Livevol, another analytics firm, showed. "This is either a one-in-a-thousand random event or suspicious options trading ahead of the announcement," said Ophir Gottlieb, managing director of Livevol.
Out-of-the-money put options are bearish positions that become profitable if the stock in question falls.
Lockheed's Whitlow said the company was committed to "upholding the highest level of ethical behavior at all times." Its policies prohibit employees from sharing material non public information or trading on the basis or material non public information, she said.
Gail Osten, spokeswoman for the Chicago Board Options Exchange, the largest U.S. equity options mart, declined comment on whether it was looking into the matter.
"CBOE takes its regulatory responsibility very seriously and does investigate unusual trading activity. However, we do not comment on individual investigations," Osten told Reuters.
The U.S. Securities and Exchange Commission, which looks into unusual stock and options activity, declined to comment.
Heavy trading just before such a significant event for the company highlights the fine line between innocuous speculation that sometimes fuels action in the options market, and trading by sources knowledgeable about coming news.
Lockheed shares closed at $89.98 on that Friday and on Monday, the stock ended at $89.81. It is trading at $89.30 as of Wednesday afternoon, hovering not far from four-month lows.
The stock had fallen sharply in the days following the re-election of President Barack Obama, which caused a bit of a negative reaction in defense-oriented stocks.
Most of the trading in the puts, contracts that allow investors to sell the stock at a fixed price by a certain date, was dominated by a January spread.. The trade was still made in expectation of a fall in shares, but with some apparent hedging.
"The majority of the put flow involved a complex bearish spread in the January 2013 term, which suggests that the trader may not have had such a strong conviction on the timing and severity of the news," Schwartz said.
One trader on Friday bought a January $75-$80-$85 put butterfly on the stock for 57.5 cents, which traded 10,000 times, said WhatsTrading.com options strategist Frederic Ruffy. Combined turnover for those three strikes was 53,000 contracts.
Unusual options trading is often seen ahead of acquisition announcements. For example, large, well-timed bullish bets in the options of Canadian oil producer Nexen were made ahead of a takeover deal announced in July this year, which raised eyebrows among some options market watchers.
In February 2010, U.S. securities regulators probed the unusual activity in Airgas Inc call options before a $5.1 billion offer for the industrial gas company was announced, a person familiar with the probe said.
The SEC, another source said, investigated in November 2009, any potential misconduct and was looking at a big jump in 3Com Corp's shares and call options activity before Hewlett-Packard Co announced a $2.7 billion offer for the network equipment maker.
(Reporting By Doris Frankel in Chicago and Andrea Shelal-Esa in Washington; editing by Ros Krasny, David Gaffen and M.D. Golan)