Insider trade on Splunk acquisition?

Can someone explain the mechanics of this specific trade to a noob? The trader bought 550k options yesterday for SPLK to hit $127/share? Since that seemed highly unlikely they were only priced at $.04 each. but now that SPLK is at $145/share they are worth $18 each? so that would be a profit of ~$10m?

No explanation needed. You got it.

An options contract gives you the right to buy or sell a security to a counterparty at a fixed price at any time on or before the expiration date.

As you note, the chances of being able to buy a share from someone on or before Friday for $127 (when the stock was publicly trading below that) was near valueless ($.04). Not anymore!

Could you please explain more about who these counterparties are exactly? Do they include brokerages?

I'm trying to understand why a counterparty would enter into an arrangement where a stock price change obligates them to financial liability like this. Presumably there's some upside if the stock price goes the other way, but it's unclear who the $ would come from in that case.

Also: Who originates options? When someone buys an option, is it the brokerage who collects the fees? Is the counterparty already involved at that point?

Let's say I own a bunch of SPLK and want to make some passive income. I am the counterparty to the call purchaser in this example.

I can sell call options 10% out of the money each week and make some nice cash. If my plan was to hold the stock long term, there's no downside risk because if the stock goes down, I get to keep the cash (premium) from selling the calls. If it goes sideways or slightly up I get to keep it as well.

The only "downside" is it goes up >10% in which case i've made that 10% + premium, but I've now had my stock taken away from me.

In this case, I lose out on an additional 10% in upside because it went up 20% overnight.

That still seems like a pretty good deal. You missed out on capturing the entire upside, but lost no real money.

Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case. In the typical case, you can continue to collect those pennies.

> In the typical case, you can continue to collect those pennies.

Top notch comment, considering options trading is often described as "picking up pennies in front of a steamroller."

> Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case

You don't come out ahead in the worst case – the option you wrote can settle deep ITM and you are compelled to sell a stock at a loss. Worst case you could lose a major chunk of change.

Suppose I buy 100 shares of $ABC for $10 (total cost for me is $1000) and then sell a call option for $1 with a strike price of (say) $50. The absolute worst case scenario is that the value of my *shares* goes to $0, in which case I've lost $999.

On the other hand, if the price shoots up to, say, $85, I'm still obligated to sell them at $50. Since I bought them at $10, I've still made $4001 profit, but I'm still dissatisfied because I would have made $7500 if I hadn't sold the call option.

What you're describing is what happens if I don't already own those shares and the price skyrockets. If the counterparty exercises their $50 option when the current price is $85, then yes, I'm obligated to buy the shares at market price and sell for a total loss of ($STRIKE_PRICE * 100) - $5000 - 1.