US$2 Billion Put options betting market crash

[123enen]

This is a little (way) over my head but I thought you guys might enjoy it!!


http://z10.invisionfree.com/Loose_Change_Forum/ar/t14413.htm

BILLIONS IN PUT OPTIONS PURCHASED BETTING THAT THE MARKET WILL CRASH BY 9-21

Posted By: RayelansMailbag
Date: Friday, 24 August 2007, 6:34 p.m. You can see why banks are running scared...they know the bottom can fall out at any moment. I'd suggest keeping minimal deposits in banks and holding on to cash.

ANOTHER HUGE SALE OF OPTION CONTRACTS

Date: Fri, 24 Aug 2007 19:43:25 GMT

Good Morning Everyone,

OTHER THAN THE EXPECTED FINANCIAL ANNOUNCEMENTS, ANYBODY HAVE A CLUE
AS TO WHAT THESE 'INVESTORS' ARE EXPECTING?

****************************************************************

THEY DID IT AGAIN. . . . ANOTHER HUGE SALE OF OPTION CONTRACTS ON $4.5
BILLION WORTH OF STOCKS BETTING THE MARKET WILL LOSE 30%-50% OF ITS
VALUE IN FOUR WEEKS!

THIS SALE ON THE SPY.X AND THE ONE FROM YESTERDAY ON THE SPY.Y
(MENTIONED TWO STORIES BELOW) ARE BEING REFERRED-TO BY FOLKS IN THE
MARKET AS "BIN LADEN TRADES" BECAUSE ONLY AN ACT OF TERRORISM AKIN TO
9-11 (WITHIN THE NEXT FOUR WEEKS) COULD MAKE THESE OPTIONS VALUABLE.

There are 65,000 contracts @ $750.00 for the SPX 700 calls for open
interest. That controls 6.5 million shares at $750 = $4.5 Billion. Not a
single trade. But quite a bit of $$ on a contract that is 700 points
away from current value. No one would buy that deep "in the money"
calls. No reason to. So if they were sold looks like someone betting on
massive dislocation. Lots of very strange option activity that I haven't
seen before.

The entity or individual offering these sales can only make money if the
market drops 30%-50% within the next four weeks. If the market does not
drop, the entity or individual involved stands to lose over $1 billion
just for engaging in these contracts!

Clearly, someone knows something big is going to happen BEFORE the options expire on Sept. 21.

THEORIES:
The following theories are being discussed widely within the stock and
options markets today regarding the enormous and very unusual activity
reported above and two stories below. Those theories are:

1) A massive terrorist attack is going to take place before Sept. 21 to
tank the markets, OR;
2) China, reeling over losing $10 Billion in bad loans to the sub-prime
mortgage collapse presently taking place, is going to dump US currency
and tank all of Capitalism with a Communist financial revolution.

Either scenario is bad and the clock is ticking. The drop-dead date of
these contracts is September 21. Whatever is going to happen MUST take
place between now and then or the folks involved in these contracts will
lose over $1 billion for having engaged in this activity.

-------------

"$1.78 Billion Bet that Stock Markets will crash by third week in September
Anonymous Stock Trader Sells 10K Contracts on EVERY S&P/Y "Strike"
Shorts Stocks "in the money" effectively selling all his SPY holdings
for cash up front without pressuring the market downward
This is an enormous and dangerous stock option activity. If it goes
right, the guy makes about $2 Billion. If he's wrong, his out of pocket
costs for buying these options will exceed $700 Million!!!

The entity who sold these contracts can only make money if the stock
market totally crashes by the third week in September.

Bear in mind that the last time anyone conducted such large and unusual
stock option trades (like this one) was in the weeks before the attacks
of September 11.

Back then, they bought huge numbers of PUTS on airline stocks in the
same airlines whose planes were involved in the September 11 attacks.
Despite knowing who made these trades, the Securities and Exchange
Commission NEVER revealed who made the unusual trades and no one was
ever publicly identified as being responsible for the trades which made
upwards of $50 million when the attacks happened.

The fact that this latest activity by a single entity gambles on a
complete collapse of the entire market by the third week in September,
seems to indicate someone knows something really huge is in the works
and they intend to profit almost $2 Billion within the next four weeks
from whatever happens!

 

[wayneL]

There may not be anything sinister in this. But interesting... looking into it.

 

[Pager]

You would have thought that if it’s only a single entity that has done this then the CIA/FBI and just about every US and British security agency would be having a serious look at who is behind it and what there connections are.

I can’t see there is anything to it, assuming the worst and someone or a group of people know there is an imminent attack about to happen that could be devastating I don’t think they would be so stupid to take such huge trades that stick out like a sore thumb.

Dont these type of rumours surface every year about this time ?, followed by the iminent October crash rumours ?.

 

[dubiousinfo]

Clearly, someone knows something big is going to happen BEFORE the options expire on Sept. 21.

THEORIES:
The following theories are being discussed widely within the stock and
options markets today regarding the enormous and very unusual activity
reported above and two stories below. Those theories are:

1) A massive terrorist attack is going to take place before Sept. 21 to
tank the markets, OR;
2) China, reeling over losing $10 Billion in bad loans to the sub-prime
mortgage collapse presently taking place, is going to dump US currency
and tank all of Capitalism with a Communist financial revolution.

If there was anything sinister to this (and I dont think there is) the APEC summit in Sydney from Sept 2 to 9 would have to be a prime contender. Dubya is in town for 3 days of it.

 

[Nick Radge]

Here is a comment I made to subscribers back on 9 August regarding the US Indices:

In the ASX-200 analysis a few nights ago I mentioned that there was an alternate bullish picture possible in the local market and that we should always be looking for an alternative argument to the one currently being put forward. Let's take a look at a few things here for consideration. Firstly the US authorities did not think interest rates needed to be lowered a few nights ago. If lowering interest rates is considered bullish, then not moving rates is considered neutral or possibly, in this environment, bearish. Yet the market went up. I have said before that when the market doesn't do what it should theoretically do, then something else is going on and you'd better be listening. The next point of interest relates to the amount of call options and put options being traded. This is called the put/call ratio and is used as an contrarian indicator. Whenever this ratio is heavily skewed to one side, we can assume that the crowd is also skewed that way and if the crowd is usually wrong then you can bet the market will move back the other way. In this case, the ratio of puts to calls is at record levels. This means that everyone is thinking the market will fall. Assuming that the "herd is always wrong" theory stands true, and that the crowd have been buying puts at record levels, we can assume that the market will most likely rise. You know the last time the put/call ratio was this high? March this year. What followed? A 4-month rally. It would take new highs for confirmation, but something to ponder amongst the doom and gloom.

 

[nioka]

I doubt this is for real. Sounds like an April 1 joke to me. Someone with a sense of humour has started something to keep us occupied over the weekend or maybe they want to buy cheap on monday. Where is the evidence that this has happened.

 

[Awesomandy]

Ever since about the middle of last week, a lot of insiders have been betting on a market crash. Why? I don't know. But then, I wouldn't worry too much about that. If the market goes up a bit next week and hits the stop losses, you'll see those options coming back out onto the market, and then being bought by the late comers who also believe the market will crash. I would be very suprised if anyone is to hold on to so many options of any kind until expiry.

 

[explod]

Whilst we pontificate lets look at some possibilities.

A lot of fundamental information coming out of the US is downright bearish to say the least and it is backed by tangible evidence. Most bullish sentiment from my observations are not qualified by evidence...... just trust me type reassurance.

Now lets look at the Dow Jones weekly chart for the last decade. Hit a top six weeks ago and looks poised on the top of a rollercoaster. If it were to fall in the next week or so by another 15% and break major support at about11000 then the next target would be the support at 8000 and our man with the puts would be well in the money.

The rises in the stockmarkets over the last year or so have been unbelievable for many, the falls may do the same; however in the bigger picture this scenerio is well within the realms of the next month of two

Not saying it will pan out, but lets look realistically at all sides. 1927/33 was worse than this idea and some say with good argument that the financial dynamics are worse this time

 

[hacheln_mice]

Puts bought during panicky periods usually expire worthless. The p/c equity ratio chart pretty much sums things up:

 

[sails]

I noticed some unusually large activity in ANZ September $22.50 puts on Friday. Total of volume of 741 and open interest increased by 711 contracts.

What we don't know is who is long and who is short on those contracts, so it really doesn't help much with direction. We also don't know if one or both sides of these transactions may hedged with shares or another derivative which can completely change the nature of a seemingly simple put trade.

ANZ's put/call ratio for September is also skewed to the put side as explained in Nick's post.

 

[explod]

With the move on the Dow since our discussion a few days ago it is worth thinking about our trader of the Puts.

As highlighted on other threads we are now looking like a confirmed down trend on the main indices and we all know "falling is faster than the climb"

Next major support on the Dow 11000, then 8500 and our put trader is on the money.

The news out of US continues to get worse.

 

[profithunter]

I noticed some unusually large activity in ANZ September $22.50 puts on Friday. Total of volume of 741 and open interest increased by 711 contracts.

What we don't know is who is long and who is short on those contracts, so it really doesn't help much with direction. We also don't know if one or both sides of these transactions may hedged with shares or another derivative which can completely change the nature of a seemingly simple put trade.

ANZ's put/call ratio for September is also skewed to the put side as explained in Nick's post.

I wouldnt read to much into the ANZ contracts, the total cost was $24000.

 

[wayneL]

There may not be anything sinister in this. But interesting... looking into it.

Adam Warner (ex options market maker) basically coming up with same view... tin foil hats off for now.

http://adamsoptions.blogspot.com/2007/08/conspiracy-theories.html

Anyway, lots of tin-foil-ish chatta about some big open interest in SPX deep (and far OTM) options. Steve Smith and Aaron Task run it down on TheStreet.

As if the mortgage-market meltdown isn't enough to spook investors, some market players are worrying about unusual options bets that some observers have dubbed "Bin Laden Trades."

The blogosphere and options trading desks have been rife with speculation about these trades, which are unusually large bets that the market will make a huge move in the next month. Some entity, or entities, has taken a large position on extremely deep in the money S&P 500 options, both puts and calls, that won't pay off unless the market undergoes an extremely large price move between now and the options' expiration on Sept. 21​

So what are the suspicious options?

The first area of focus is that open interest on September 700 S&P puts is 116,000 contracts, an unusually high number for such a low-probability trade. A put is a defensive bet that gives the holder the right to sell a security at a specified price, in this case more than 50% below the S&P 500's current level of 1463 as of Wednesday's close.

For comparison's sake, according to the Option Clearing Corp., the open interest in the July 700 strike some three weeks prior to expiration on July 20 was 790 calls and 7,300 puts, and the August 700 strike showed 1,250 calls and 14,800 puts prior to Aug. 17 expiration.

And the volume completely outstrips anything seen last September, when the S&P was around 1300, some 20% below current levels. In September 2006, the 700 strike had 600 calls and 7,500 puts, and no strike below 1000 had open interest surpassing 42,000 contracts, and that was the 900 puts.​

Someone asked me in a comment the other day about some of these trades. My thought was maybe some sort of dividend capture play, I REALLY REALLY REALLY doubt this is some prediction of anything. For about a jillion different reasons, the purely financial one being why in the world would that be the play? Forget terrorism for a sec. I mean let's say you had reason to think the market was going to gap down for whatever reason, would some play in options so far away make the most sense? I would think just simply buying nearer puts would do it.

So my best guess is something fairly innocuous, like a dividend or interest rate sort of play. Or maybe something having to do with capital usage or taxes.

 

[dubiousinfo]

Here is another view on the puts that suggests there is nothing sinister.

Looks like I can cancel the food order for my underground bunker.

Dispelling the 'Bin Laden' Options Trades

By Steven Smith and Aaron L. Task
Staff Reporters
8/30/2007 3:23 PM EDT

As if the mortgage-market meltdown wasn't enough to spook investors, some market players expressed concerns about unusual options bets that some observers have dubbed "Bin Laden Trades."
The blogosphere and options trading desks have been rife with speculation about these trades, which are unusually large bets that the market will make a huge move in the next month. Some entity, or entities, has taken a large position on extremely deep in the money S&P 500 options, both puts and calls, that won't pay off unless the market undergoes an extremely large price move between now and the options' expiration on Sept. 21.

However, Dan Perper, a Partner at Peak 6, one of the largest option market makers and proprietary trading firms, has confirmed that the trades are part of a "box-spread trade."

"This was done as a package in which the box spread was used [as a] means of alternative financing at more attractive interest rates" explained Perper.

Simply put, two parties agree to trade the box at a price that essentially splits the difference between current rates.

For example, the rough numbers would be that given the September 700/1700 box must settle at a value of 1,000 -- it is currently trading around 997 -- that translates into a 5% interest rate.

For the seller it is a way to borrow money at a slight discount to the prevailing rate, and for the buyer, it is a way to lend money at a low rate of return, but it's better than nothing at a time when others are scared and have painted themselves into a box (ha ha) because they have run out available funds.

Currently there are about 63,000 700/1700 boxes open. Perper expects that once the September options expire, you will see similar boxes established in the December series. As to why the September 700 put has over 116,000 contracts open, Perper thinks a good portion of that was created from the prior rollover when April options expired.

The positions in question had option industry experts perplexed to come up with a rational explanation, which are far from the best or most efficient way to profit from what would be outlier events.

Those concerned about the worst-case scenario recalled that large put contracts were placed on airline stocks, notably American, a unit of AMR and United Airlines, in the weeks leading up to the Sept. 11, 2001 terror attacks.

The first area of focus was that open interest September 700 S&P puts had such an unusually high number for such a low-probability trade. A put is a defensive bet that gives the holder the right to sell a security at a specified price, in this case more than 50% below the S&P 500's current level of 1463 as of Wednesday's close.

For comparison's sake, according to the Option Clearing Corp., the open interest in the July 700 strike some three weeks prior to expiration on July 20 was 790 calls and 7,300 puts, and the August 700 strike showed 1,250 calls and 14,800 puts prior to Aug. 17 expiration.

And the volume completely outstrips anything seen last September, when the S&P was around 1300, some 20% below current levels. In September 2006, the 700 strike had 600 calls and 7,500 puts, and no strike below 1000 had open interest surpassing 42,000 contracts, and that was the 900 puts.

The bulk of the September SPX trades in question have been put on since June 1. Similar bets have also been placed on the DJ Eurostoxx 50 index, which won't pay off unless the index tumbles nearly 25% to 2800, or below, by expiration on the third Friday of September.
The trades were noted in various online forums, where the worst case scenario is often the first conclusion: "Only an act of terrorism akin to 9-11 -- within the next four weeks -- could make these options valuable," writes one poster in the TickerForum chat room.

Others, such as the "Just Wondrin What Happened" blog, speculated that "China, reeling over losing $10 billion in bad loans to the sub-prime mortgage collapse presently taking place, is going to dump U.S. currency and tank all of Capitalism with a Communist financial revolution."

Furthermore, the TickerForum posters focused on the 65,000 contracts open on SPX 700 calls, ostensibly bullish bets that give the holder the right to buy the index at that level.

Given the fact that these calls are some 700 points in-the-money, and therefore have a delta of 1.0 -- meaning the options price moves dollar-for-dollar with the underlying index -- "the only advantage to owning them is it would be a more efficient and slightly less capital-intensive way to gain one-to-one exposure" to the S&P 500, Randy Frederick, director of derivatives at Charles Schwab, writes in an email exchange.

Frederick noted the Spyder Trust (SPY - Cramer's Take - Stockpickr - Rating) and other index and exchange-traded products provide a much more liquid, efficient and higher-leveraged way to establish a bearish position quickly.
Plus, it's a lot easier to "hide" a big trade in the Spyders than the SPX options, which are only traded on the Chicago Board of Option Exchange and will be seen and facilitated by a tight-knit group of market makers.

Because there are about half the number of open contracts on S&P 700 calls vs. puts, it was also posited that these trades are part of a large strangle.

There is also open interest of 61,741 on the September 1700 puts. "Since this is only 11 contracts different from the 700 calls, it is possible that these two positions are making up a very large strangle, which could be either a breakout or neutral strategy depending upon whether or not it is a short strangle or a long strangle," writes Frederick. "If this is a short position, it may be anticipating the market will drop if the Fed does not cut rates as many expect" at its Sept. 18 policy meeting.

But such a strangle trade, with each leg being so deep in the money, would require a nearly 50% price move, up or down, to turn a profit.

Frederick said the position leaves him more confused than scared, although he wouldn't dismiss the frightening conclusion bloggers have come to. "It is also interesting that the anniversary of 9/11 occurs between now and the expiration of these options," he writes. "Perhaps there is speculation that another attack is in the works."

Brian Overby, director of education at TradeKing, a discount broker that caters to sophisticated option traders, suggested that this could be a box trade before Perper came forth.
Overby noted that the September 1700 strike has open interest of 73,745 calls and 61,741 put options. "This could be someone trying to create a box spread, which is a position composed of a long call and short put at one strike, and a short call and long put at a different strike. The position is largely immune to changes in the price of the underlying stock, and in most cases, is a simple interest rate trade."

So the upshot is there is an explanation for this very unusual configuration of open interest in the S&P 500 Index's September options, but it also shows jitters remain in this market

 

[wayneL]

Mystery solved.

Via Adam Warner:

Steve Smith solves the S&P options mystery.

But I'm glad to now be able to confirm that this was not a cloak-and-dagger situation. It was the least glamorous of the scenarios, the box-spread trade, that explains and is the catalyst for the activity.

Dan Perper, a Partner at Peak 6, one of the largest option market makers and proprietary trading firms, told me this morning that his firm was the counterparty to a good portion of the volume and position in question. "This was done as a package in which the box spread was used [as a] means of alternative financing at more attractive interest rates" explained Perper.

Simply put, two parties agree to trade the box at a price that essentially splits the difference between current rates.

For example, the rough numbers would be that given the September 700/1700 box must settle at a value of 1,000 -- it is currently trading around 997 -- that translates into a 5% interest rate.

For the seller it is a way to borrow money at a slight discount to the prevailing rate, and for the buyer, it is a way to lend money at a low rate of return, but it's better than nothing at a time when others are scared and have painted themselves into a box (ha ha) because they have run out available funds.​

Well, that makes some sense. That's also what I generally meant when I thought it might be some sort of interest rate play. Although I guess it's not so much a play as a lock on a return.