Interesting news from an email I got today. I'm not sure if its a rumour or not, but I thought I'd share with you guys anyway. Also, here's a link to a discussion board talking about it: http://www.tickerforum.org/cgi-ticker/akcs-www?post=4669
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Did you see this story (from NY) it makes alot of sense considering the brokers report earning $4.5 billion options bet on catastrophe within four weeks. Anybody have a clue as to what these 'investors' are expecting?
The two sales are being referred to by market traders as "bin Laden trades" because only an event on the scale of 9-11 could make these short-sell 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.
Here's the story:
"$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! This is really worrisome."
Is it possible it's just a hoax? I must be green, but I didn't know there was an SPX700? Did you verify the source you're quoting? The only reference I find googling this is the same story appearing on websites I've never heard of.
The same story made the news about the Eurostoxx 50 a couple of weeks ago, but was proven to be a hoax too.
I see. I thought they called the index SPX700. 700 is the strike price.
There are 63,000 Call Options at 700 (trading at $747) and 118,000 put options at 700 (trading at $0.05). It's unusual money, but it shows a bullish expectation, not an impending catastrophe. The trader that has 118,000 contracts at $0.05 is exposed for $0.05x100x118,000 = $590,000, not $700,000,000. It's guy with the in-the-money calls who's betting $4.5B that the market will go up, not down. One should be careful about the math and conclusions made by all these conspiracy.com type of journalists.
It's expensive only if they are naked calls. Nobody has established that the writer doesn't have the collateral.
I'm not saying it's not odd. It's a lot of money. I fail to see that the writer has a lot on the line. We don't know what they were written at and maybe that's where the scary part lies, but right now, they are trading at less than 1% premium over the index value.
All what was established so far, is that someone has deep pockets to move money around the market. There are lots of expensive puts at 1700, but we haven't established that they are naked either. It looks like someone with $10B in assets has a protected covered write, or something funky going with advanced option strategies.
Nobody has established that all options were written by the same organization/individual either.
Sorry....my links don't seem to be working right. Here's the link for the SPY index (S&P Depository):
http://delayedquotes.cboe.com/options/options_chain.html?ASSET_CLASS=FUN&ID_OSI=89891&ID_NOTATION=11007893
What is odd to me is that these call options are HUGELY in the money....therefore with a delta of 1. I can't picture this being a hedging strategy of any sort. And I cannot ever imagine so many people interested in such in-the-money options....what's the point? That's why I firmly believe that it's likely one person (or organization) doing it.....
It's actually the site. It adds a space somewhere in the link, so if you're cutting and pasting it back you must remove all spaces. Or you could also try tiny url's which don't seem to be affected (as far as I can tell).
Let's say I have $1454 invested in the S&P 500 index, and I think the market is too volatile for my stomach. I instead write options that I know will be called for $700. I get $756 for them. I locked my profit and I protected myself against a 30-50% downturn as the conspiracy guys say, but also against a 5% downturn.
Worst case: The market goes up, I make little or no interest (~1%/yr at current quoted rates) and get called.
Better case: a 5% downturn hits, SPX is down to $1380, I get called at $700, but I still have $1456 in my pocket. I either keep the cash because that's what I wanted anyway (out of the market), or i buy back into the S&P 500 with 5% more assets than I left with.
The last trade was at $747, and the index is down today. As I said, the current yield is 1%, but it's not to say that the options weren't written at 4-5% yield earlier. Maybe a large fund or institutional investor looked at the LIBOR market and thought it was too risky. They looked at t-bills and thought the yield was way too low, and now, they are pulling an "a la pitzel" type of scheme which is guaranteeing them a safe yield between tbills and LIBOR rates. Remember: a lot of people are looking at safer investments to park their fixed income products right now. Arbitrage opportunities will be used if they can give a better yield at a lower risk.
Maybe there is other arbitrage opportunities that presented themselves with the out-of-whack borrowing benchmarks. Maybe interest premiums on futures are priced at LIBOR while interest cost on short options are closer to tbill rates, or something of that kind that us mere mortals have not identified.
The following is the interpretation by Steve Smith at TSC earlier. Since he located the big counterparty in most of the trades, the explaination is more credible. The remaining question is which institute wants to raise this big amount, likely a hedge fund.
Steven Smith
Dispelling the Bin Laden Trade
8/30/2007 2:22 PM EDT
Much has been made of the large and unusual, open interest that has appeared the S&P 500 index options as discussed in this morning's article and a range of online articles such as this that have the conspiracy theorists out in full force. Since it fell into the option domain, I would have been remiss in not reporting about it.
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.
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.
But we'll leave open the possibility that some portion of that is owned by a guy wearing tin foil on his head and had an extra half billion dollars to spend.
I was wondering if you could provide a link or other info about the put options on the Eurostoxx 50 being a hoax? I am interested because if the put options on the Eurostoxx 50 are real that would provide circumstantial evidence that writing the ITM calls on the SPY are a bet on the market falling, rather than some sort of 'spread' trade in order to raise some short term cash or something. Also I can find evidence that the 700-950 strike price call options are real by going to http://finance.yahoo.com/q/op?s=SPY, but I am yet to see any direct evidence of someone shorting the Eurostoxx 50 with billions of dollars.
