Matt Levine wrote some good articles on how people get busted.
The main point is you can't buy or sell securities without identifying yourself. So when someone opens a new account and buy out-of-the-money call options that expire a few days after an earnings announcement it's not hard for the SEC to flag all those.
Then all they have to do is look up that person and see if they have any connection to the company. They can look at who you are connected to on LinkedIn, who you live with, where your family is employed. Then they come to that person and ask them a question that seems innocuous "Have you ever discussed Company X with <insert name>". If you lie, then you've already committed a felony when they get your text records or email or Whatsapp.
I think an element people miss is that to make more than negligible amounts of money from this stuff, you generally need to invest large amounts or or make the trades many time, or both. ... and this generates a pretty strong signal.
"Hmm. This guy just bet his entire account on a crazy bet and won" or "Hmm. This guy flipped a coin and it came up heads 20 times in a row."
I have no idea if it would work, but having a few years of making similar trades (some winners/some losers) likely helps stay off the SEC's radar.
A track record of buying and selling similar options in similar amounts is much more explainable than only contributing a few thousand to your Roth IRA by buying ETFs, then suddenly making a few hundred thousand on your first options purchase that so happened to be in a single company that a LinkedIn contact works for.
By the time the SEC is knocking on your door asking questions you're already screwed.
The main point is you can't buy or sell securities without identifying yourself. So when someone opens a new account and buy out-of-the-money call options that expire a few days after an earnings announcement it's not hard for the SEC to flag all those.
Then all they have to do is look up that person and see if they have any connection to the company. They can look at who you are connected to on LinkedIn, who you live with, where your family is employed. Then they come to that person and ask them a question that seems innocuous "Have you ever discussed Company X with <insert name>". If you lie, then you've already committed a felony when they get your text records or email or Whatsapp.