Mystery trader bets market will crash by a third

[Temjin]

I know I already made a post in another thread, but I thought I would get more attention here by starting a new thread. Sorry.

http://www.financialnews-us.com/?page=ushome&contentid=2448565379

Mystery trader bets market will crash by a third
Renée Schultes
16 Aug 2007
Carry trade unwinds as yen hits one-year high

An anonymous investor has placed a bet on an index of Europe's top 50 stocks falling by a third by the end of September, as world equity markets plunged for a third day and volatility hit a three-year high.

The mystery investor has bought put option contracts on the DJ Eurostoxx 50 index that will result in a profit if it plunges to 2,800 or below by the end of September. Based on the 2,800 strike price, the position covers a notional €6.9bn, and potentially even more using a market price of about 4,100 when the trades were done on Tuesday and Wednesday.

The identity of the investor is unknown but market sources speculated it was either a large hedge fund hedging itself against deepening losses, or a long-only fund manager pressing the panic button to protect its gains.

The investor has bought a total of 245,000 put options on the index. The September put option with a 2,800 strike was the most popular DJ Eurostoxx 50 contract yesterday, according to data from Bloomberg.

Volatility in European equity markets has risen sharply this week as investors cut back on the amount of risk they are taking. The VSTOXX index, which measures the volatility of the DJ Eurostoxx 50 index, hit 34 this morning, which is more than double its three-year average.

Similarly the volatility of the US stock market was trading at almost three times its three-year average, hitting 30 yesterday.

However, both indices continue to trade below their 2002 highs.

European stock markets were trading down almost 3% at by 13:00 GMT today, after large drops in Asia and Australia overnight. The Australian market fell 300 points at one stage when futures trading was suspended for over an hour and traders were forced to hedge positions by selling physical stocks rather than futures.

An analyst at Goldman Sachs JB Were in Australia wrote: "I think I shall remember this day as the day that I saw the market go to hell, look into the abyss - didn't like what it looked like and then came screaming back up as far away from there as it could get. ... It was a truly spooky day and I’ve seen a lot over the last 20 years but today will be one that anyone who saw it will never forget. But this is what market bottoms are made out of."

The rise in volatility and risk aversion has also contributed to a sharp appreciation in the Japanese yen, which has been used to finance the so-called carry trade, where investors borrow in a low-yielding currency to invest in one with a higher-yield.

Analysts' belief that the yen carry trade is set for a major unwinding has intensified today as the Japanese currency continued to rally in morning trade.

The yen strengthened today as it broke through several psychological barriers. The yen hit 113.60 against the dollar by 12:35 GMT, the first time in more than a year it has dropped below 114. The yen was substantially up against the dollar from yesterday, when it traded at above 116.

Simon Derrick, head of currency research at Bank of New York Mellon, said: "With any hope of even a brief bounce emerging in the yen crosses evaporating in the fierce glare of another horrible close in New York, it is clear that the vicious, self-reinforcing, downward spiral we were worrying about is already firmly established."

Lots of other information here,

http://www.google.com.au/search?hl=en&q=mysterious+trader+put+option+dow&btnG=Google+Search&meta=

Geez, are we in for a market crash at last here? A huge bet against something like this isn't child play, someone got to know something is going to happen or he/she faces over $750million-$1 billion lost.

 

[wayneL]

I doubt this is any punt on a crash. This has already been dispelled for the US version of the option trades. I'm not saying the market won't crash, just that the trade is probably not a punt on it.

http://www.thestreet.com/s/terror-t...ysis/optionsfutures/10377063.htmlpuc=googlefi

Firstly, the strike price is WWWTFOTM (way way way the f*** out of the money). This is such a low probability trade it's ludicrous.

Secondly, there is always another side of the trade. Someone must sell the puts, so is the trade a buy or a sell. Likely it is not strictly either and probably hedged off and market neutral as per the article linked to.

Thirdly, who would be silly enough to do this now that it is so well known? If there was a massive terrorist attack, the trader would be the first suspect to be arrested.

No, I don't think there is anything sinister in it.

 

[Miner]

If market is to be driven by betting games then people like Warren Buffet and banks will not exist.
However there could be something hidden as many more impact to be seen in mid Sept.
DOW jones has plunged on Friday again.
Alan Kohler in Eureka Report virtually asked to hold breadth until 15 September.

If we know the answers then life would have no fun to say '"I TOLD YOU".

Let us pray it will be a win-win.

Regards

 

[Nick Radge]

I'm sure the answer is quite straightforward. I had a ball of a time back in 2000 and 2001 selling puts that were way out the money and being bought in large quantities. We found out the buyer was a Macquarie fund that stated in its disclosure document that they had to have a certain amount of short side protection. Every so often they'd come out and buy 4000 or so puts in the SPI about 500 points OTM. They almost always expired worthless. This is probably what is happening here and its probably been going on for a long time.

 

[Temjin]

I'm sure the answer is quite straightforward. I had a ball of a time back in 2000 and 2001 selling puts that were way out the money and being bought in large quantities. We found out the buyer was a Macquarie fund that stated in its disclosure document that they had to have a certain amount of short side protection. Every so often they'd come out and buy 4000 or so puts in the SPI about 500 points OTM. They almost always expired worthless. This is probably what is happening here and its probably been going on for a long time.

Yeah, it could be just a hedging tactic. The link to terroism is probably a coincidence because of the 9/11 anniversary?

Regardless, while I am all cash, I do not want to see my parents' super value to shrink dramatically. I guess we will find out in the next few weeks.

 

[Awesomandy]

Regardless, while I am all cash, I do not want to see my parents' super value to shrink dramatically. I guess we will find out in the next few weeks.

At least the investments of your family as a whole are diversified.