Last week, Ebix received a letter from the U.S. Attorney General for the Northern District of Georgia informing them that they were opening an investigation into allegations of business malpractice brought to their attention by pending shareholder class-action lawsuits. Ebix has dealt with allegations such as these before and they were all disclosed in its reports filed with the SEC. Ebix Chairman and CEO Robin Raina believes that these allegations are without merit and will be dismissed.

Despite CEO affirmations that everything is okay, some speculators believe that shares in EBIX can plummet all the way to zero. According to Gotham City Research, the stock is at most worth $8.00 per share. That is a generous estimate, as they did not take into account any accounting irregularities, regulatory event risk, flat/declining organic growth, tax risk, and other risks identified in their prior reports.

Ebix is also severely in debt. It owes over $80 million and $100 million to creditors and U.S. taxpayers, respectively. 

Last month, Ebix announced results for the first quarter of 2013. Total first quarter 2013 revenue was $52.6 million, an increase of 20% on a YOY basis, as compared to first quarter 2012 revenue of $43.8 million. Diluted earnings per share for the first quarter 2013 rose 13% YOY to $0.45, as compared to $0.40 in the first quarter of 2012.

The “Institutional Trade”:

On 5.24.2013 a trader sold 1678 EBIX July 20 Puts for $.60

Their Risk: $1940 per 1 lot
Their Reward: $60 per 1 lot
Breakeven: $19.40
Cash Received: $100,680

On 6.20.2013 These Puts are Trading for $8

This Trade has Lost: (1678 * $8 – $.60 * 100)= $1,241,720

(Full Disclosure: I am long EBIX July 20 Calls for $.20

Unusual Option Activity:

We define unusual option activity as large block trades that represent a large percentage of daily option volume. The block trade is considered “unusual” if the option volume is above the average daily volume over the past 22 days. At KeeneOnTheMarket.com we scan and analyze order flow from all of the major options exchanges in order to identify any unusual option activity.

Analyzing unusual order flow gives traders a window into what the positions that large institutional players have. The majority of unusual option activity can be traced back to hedge funds, mutual funds, and other large institutions. Knowing where these institutions are placing their bets can be hugely advantageous for any trader. These institutions have informational and technological advantages that the average trader doesn’t have, and the amount of time and analysis that goes into every one of their trades is substantial.  We offer this service through our 7 hour daily LIVE trading room http://bit.ly/135QWt8 or through Premium Twitter feed with all entries, exits, and unusual options activity tweeted all day long: http://bit.ly/11f0L9u .

Order flow can however at times be deceiving. One might logically thing that a large block buyer of calls is bullish on the underlying. This is not always the case. Remember that a large number of participants in the equity options market are hedgers. Long calls are a hedge against short stock, and long puts are a hedge against long stock. With this in mind we have developed a 7 step trading plan that helps filter out unusual option activity that will not provide actionable trade setups. It is by using this plan that we are able to identify the most significant unusual options activity trades every day. 

Paper bought 1,000 NVDA Jul 10 Calls for $1.10 (7.8 times unusual volume) with stock at $9.08
Paper bought 39,800 S 7/5 Weekly 7.5 Calls for $0.06 (2.1 times usual volume) with stock at $7.10
Paper bought 4,100 NVDA Jan15 10 Calls for $5.70 (4.6 times usual volume) with stock at $15.38
Paper bought 2,000 CTAS Jul 42.5 Calls for $3.80 (3.1 times usual volume) with stock at $45.90
Paper bought 134 MED Sep 30 Calls for $1.40 (8.8 times usual volume) with stock at $28.08

There have been varying statements about what the Fed plans to do and Chairman Ben Bernanke has made comments that state the Fed could increase or decrease it’s purchasing of bonds. The statement that will be made today depends on how the Fed has felt about the state of the economy and if it is still in need of support. In the announcement later today it is likely that whatever decision Bernanke plans to make it will not go into effect immediately. Most economists expect that the Fed will not be announcing a change at its interest rate target, which is at 0% to .25%. The statement made today is likely going to reiterate the Fed’s current plan to keep short-term interest rates near zero. It is also likely that there will be no change in the bond program where they are currently spending $85billion a month, this program is otherwise known as the quantitative easing (QE) program. There is a huge question though of when the Fed will actually start the tapering process of the QE. Economists at Morgan Stanley and Deutsche Bank do not expect to hear anything new today and are not expecting a change in the bond- buying program. However, they do expect to see the tapering process begin in the near future.

People watching the announcements will be looking for a difference in tone or word choice from Bernanke that might hint at when the tapering will actually begin. By analyzing what Bernanke says about the economy will provide important insight to the potential date of when the Fed might begin to pull the bond program later in the year. If he says that the economy is stable or improving than we can most likely expect the Fed to begin to pull this program in the coming future. A few months back Bernanke discussed how they were not going to change the short-term interest rate until unemployment was at 6.5%, which we are not currently at. This leads to further confidence in the fact that no changes will be announced today with regards to the Fed’s bond purchasing program. There is speculation however that Bernanke will try to be as clear as possible on what the job market will need to look like in order for the Fed to begin the process of tapering off their bond program.

There have been varying statements about what the Fed plans to do and Chairman Ben Bernanke has made comments that state the Fed could increase or decrease it’s purchasing of bonds. The statement that will be made today depends on how the Fed has felt about the state of the economy and if it is still in need of support. In the announcement later today it is likely that whatever decision Bernanke plans to make it will not go into effect immediately. Most economists expect that the Fed will not be announcing a change at its interest rate target, which is at 0% to .25%. The statement made today is likely going to reiterate the Fed’s current plan to keep short-term interest rates near zero. It is also likely that there will be no change in the bond program where they are currently spending $85billion a month, this program is otherwise known as the quantitative easing (QE) program. There is a huge question though of when the Fed will actually start the tapering process of the QE. Economists at Morgan Stanley and Deutsche Bank do not expect to hear anything new today and are not expecting a change in the bond- buying program. However, they do expect to see the tapering process begin in the near future.

People watching the announcements will be looking for a difference in tone or word choice from Bernanke that might hint at when the tapering will actually begin. By analyzing what Bernanke says about the economy will provide important insight to the potential date of when the Fed might begin to pull the bond program later in the year. If he says that the economy is stable or improving than we can most likely expect the Fed to begin to pull this program in the coming future. A few months back Bernanke discussed how they were not going to change the short-term interest rate until unemployment was at 6.5%, which we are not currently at. This leads to further confidence in the fact that no changes will be announced today with regards to the Fed’s bond purchasing program. There is speculation however that Bernanke will try to be as clear as possible on what the job market will need to look like in order for the Fed to begin the process of tapering off their bond program.