UPDATE 1-Trades in 3Com, ahead of HP deal news, turn heads

Thomson Reuters






* 3Com call option volume surges ahead of proposed deal

* 3Com $5 call options stand out as shares rise

* 3Com shares up 35 pct at $7.69 after the bell
(Adds details of options trades, analyst comments, paragraphs
11, 15-17)

By Doris Frankel

CHICAGO, Nov 11 (Reuters) - A jump in 3Com Corp
shares and call options on Wednesday before a $2.7 billion
offer for the company was announced sparked talk that the news
had been leaked, option traders and analysts said.

Hewlett-Packard Co announced the deal to buy the
network equipment maker after the closing bell on Wednesday.

At first glance, option traders said, the hallmarks of
suspicious trading were there: shares of 3Com jumped 28 cents,
or 5.18 percent, to $5.69 during the day, rising from the
opening bell and closing a penny off the high of the day.

After the bell, 3Com shares shot up about 35 percent at
$7.65.

Option market sources said it wasn't just the stock
behaving oddly ahead of the late afternoon news. Volume in 3Com
call options -- which convey the right to buy the company's
shares at a fixed price within a specified time period --
soared.

A total of 8,085 calls traded against only six puts. That
amounted to 17 times the recent average daily call volume,
according to option analytics firm Trade Alert.

"The rise in 3Com shares and a surge in call volume before
the takeover announcement tell us that somebody's timing was
extremely good," said Jon Najarian, co-founder of optionMonster
a Web information site.

"Since I do not believe in coincidences on Wall Street, I
would bet that these unusual call option trades will spark an
investigation," Najarian said.

The Securities and Exchange Commission, which looks into
unusual options and share trading activity, was closed on
Wednesday in observance of the Veterans Day U.S. holiday.

Options traders said the surge in 3Com call volume was
focused in the November and December $5 calls, which convey the
right to buy 3Com shares at $5 apiece.

The volume in both strikes far exceeded their contracts
outstanding, indicating new positions were initiated.

"The unusual volume in the November and December $5 calls
indicated a red flag and would be a sign that this news was
leaked ahead of the announcement," said Jeff Shaw, head options
trader at Timber Hill, a division of Interactive Brokers
Group.

Frederic Ruffy, options strategist at WhatsTrading.com,
said most of the trading in the $5 call strike occurred around
noon Eastern time (1700 GMT), when 3Com shares were trading at
around $5.60.

Ruffy said one trade for 3,800 November $5 calls was done
at a premium of 65 cents per contract. The premium for those
calls closed at 65 cents, up 10 cents on the day.

The December $5 calls were purchased for 75 to 80 cents
apiece. The premiums for those calls ended at 85 cents per
contract, up 20 cents from Tuesday.

If the transaction is completed as announced, both call
contracts will end up valued at about $2.90, a gain of 346
percent for the November strikes and 263 percent for the
December contracts, according to the optionMonster website.

Calls outpaced puts by a bullish ratio of 1,348-to-1. The
fact that only a total of six puts traded also "indicated
something was brewing in 3Com," said William Lefkowitz, option
strategist at brokerage firm vFinance Investments.
(Reporting by Doris Frankel; Editing by Gary Hill)