Posted on 09/08/2007 6:40:21 AM PDT by jefferson31415
$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.
(Excerpt) Read more at canadafreepress.com ...
The call buyer is out the money he spent to purchase the option if he does nothing else.
If this is not a hoax, it is likely the other side of a hedging strategy.
Simply put, the Dow or S&P doesn't have to drop 40% in order for a 40% short to pay off.
Not that I understand it but: http://www.thestreet.com/newsanalysis/optionsfutures/10377063.html
"DEBKAfile’s military experts conclude from the way Damascus described the episode that the Pantsyr-S1 missiles were a letdown because they failed to down the intruders and therefore leave Syria and Iranian airspace vulnerable to hostile intrusion. Such information on the Russian weapons systems sold to both countries is essential to any US calculations of whether to attack Iran. "
Certainly you do not believe our or other politicians, friend or foe, are beyond making some money off of inside info?
I would short Mecca if I could figure out how.
Like betting the number 13 on roulette every friday 13th?
"The most dangerous place in the world today is not Iran or Iraq," U.S. Rep. Randy Forbes, R-Chesapeake, said in an interview. "It's the Taiwanese strait."
Forbes said an eight-day trip to China last month gave him a freshened sense of the country's growing economic and military strength and heightened concern about possible Chinese moves against Taiwan.
The options will be sold (bought?) on 12 Sept. It's a fair amount of money, but the potential return is huge. If it doesn't work out, at least it wasn't a total gamble.
OK FOLKS, LISTEN CAREFULLY!!!!
These are CALLS, not PUTS. CALLS are options to BUY the item, not options to SELL. These are not "700 points" out of the money, but are in fact almost 700 points IN the money.
In other words, they are ALREADY worth $4.5 billion dollars.
People buy calls like this all the time. They have almost no "time value", and there cost is almost equal to the cost of the shares. And they move pretty much in step with the underlying stocks.
So they are a simple way to purchase twice as much stock without having to go on margin loans.
To buy that much of the SPX 700 would cost twice as much money.
There ARE a large number of PUTS also, but they could have been years old and just coming to expiration. Someone could have bet against this stuff a couple of years ago, and once they are worthless there's no point in selling them.
BTW, I can't find the price on the "750 puts", but I guarantee you they aren't even going to cost you a dollar, meaning 65,000 of them would only cost you 6.5 million, not billions.
Think about it. If someone offered you a billion dollars to sell to them the chance to force you to buy the SPX 700 at 750 dollars a share, wouldn't you take the money and run? So would anybody with a brain.
One more thing. If you buy a PUT, it means you can force someone to buy the item from you at that price. They way you make money is that if when it comes due, the item is cheaper, you could BUY the item at a cheaper price, and force people to purchase it from you.
SELLING PUTS is the most dangerous thing to do, because you CAN'T protect yourself, and can be forced to purchase worthless stuff. But you DO know your maximum loss, which would be whatever the strike price is.
SELLING CALLS is the most "risky" thing from a total loss perspective, but is actually pretty safe if you don't mind leaving money on the table. You just buy a stock, and then sell to someone the right to buy it from you at a price. You put money in your pocket, and at WORST you have to sell the stock at the price you agreed to. But if in the meantime the stock doubles, you've lost all that gain.
Selling calls on stocks you own that don't move is a great way to add a little bit of extra money to your portfolio each month.
Anyway, wanted to clear up the confusion about these 65,000 CALLS, not PUTS.
in a BOX trade you can bet that a stock will MOVE, without having to pick which way it moves. But you wouldn’t bet using items that were way out of the money, because they simply don’t gain enough value, since until they are IN the money their only value is a time value, which drops to zero as you reach the end of the contract.
A typical box trade might bet a stock would either go UP or DOWN 10%, buy BUYING the right to sell at 5% up, and to BUY at 5% down. If it moves 10%, your one option is worthless but the other generally will have doubled in value, and if the stock is really volatile you might actually sell back BOTH of your options before the strike date and clean up.
Of course, stocks that have been moving a lot have LARGE time costs associated with them which makes it hard to make money.
OOps. That’s not the standard definiton of a box trade. Also, since they won’t tell us who makes which trade, you can only SPECULATE about whether it is a box trade.
In a “box trade”, a person buys and sells both puts and calls at below and above. It’s like betting on both black and red, which seems like it can’t lose except there’s 0 and 00. In this case, there’s a premium price, or spread, between buying a selling so if nothing moves at all you’ll lose money, but sometimes these box spreads can make money if there is a trivial interest rate move for example such that there is a general adjustment of risk one way or the other.
OK, it’s very hard to explain why a box could make you money. If it was easy to make money, everybody would already be doing it.
Sometimes though there’s way for an individual to use these things to make money pretty safely that the big brokerages simply can’t take advantage of because any serious money would ruin the scheme.
The fact that they will become widely known will probably make them worthless.
I found some more info. The SPX700 $700 puts were recently priced at $0.05, that’s the price per share, an option covers 100 shares, so it costs you $5 total per option. 65,000 options would cost you a couple hundred thousand dollars.
Meanwhile. the SPX700 $700 calls were priced at $747. Add them and you get 1466, if you exercised the calls you’d make about 19 bucks per call (this probably means my info if off a little, because that’s a pretty decent value for the bet that the market simply won’t move up OR down).
Well, that’s it then. You’ve gone and ruined a perfectly good conspiracy rant.
Exactly, the CBOT would not honor those trades, and the accounts used to purchase them would be tracked by the FBI and Interpol and the people quickly arrested.
bttt your excellent post!
A lame duck, unpopular President is a dangerous thing to f**k with. Bush has nothing to lose now. If they nuke NYC, LA or DC, he would most certainly respond with nukes as well.
If some huge plot is foiled in the next couple weeks there will be some real sore losers.
======
So sayeth some anonymous ''journalist'', eh?
Before detailing this 'trade' in plain English, let me first say that whoever wrote this A) might have a point and B) explains it so poorly that whatever point he might have gets lost. Second, let me say, he/she might just be a plain garden-variety dingbat.
First, you'll notice that the headline refers to PUT options, yet the paragraph quoted above refers to CALL options. WTF?? A pretty incoherent start to an article.
Second, SPX is a construct product. It doesn't represent shares at all, but the S&P 500 Index. We might say that 1 SPX contract represents 100 ''share-equivalents'' and be accurate, but not 100 ''shares''. The Index itself (so-called ''cash S&P'') is the adjusted sum of the prices of 1 share of each of the stocks in the S&P 500.
Third, and this will require some little preface to explain, the SPX mkt -- or at least the 700-strike options -- is offering a bullish play right now, not a bearish one. I know you folks aren't options traders, so let me lay it out for you.
Here are tonight's relevant prices:
SPX is 1453.55. The SPX 700 calls are 757.10 bid, 759.70 offered (note: this is a very wide bid-offer spread for these options, just be advised). The SPX 700 puts are .05 offered, no bid (note: this is quite reasonable, given that they expire in 2 weeks' time, and would require a 750+ pt drop in the S&P in that time frame in order to become profitable).
Now, if I (or any trader) would buy the 1 SPX contract at tonight's settlement price, and then sell (the usual term is 'write') exactly 1 SPX 700-strike call at the bid (757.10) against my long SPX position, here's the math for my position:
Presumably, 2 weeks from now, the owner of the SPX 700 call that I sold ('wrote') will exercise his option, because (again, presumably) SPX is enormously likely, ceteris paribus to be above 700. These options settle for cash, nothing is delivered or assigned, unlike, say, IBM shares.
My results? Bought 1 SPX at 1453.55. Sold 1 SPX at 700 (courtesy of the call option being exercised -- the buyer of the call option has the absolute right to demand that I sell him SPX at 700), gross result before commissions = -753.55 points. Cash in pocket from selling the SPX 700 call, gross = 757.10 points. Net profit to me = 3.55 points gross.
This P/L statement will be accurate if SPX is ANYWHERE above 700 on 20 September at the close (the options are so-called ''European style'', they can be exercised only on the last trading day, unlike, again, IBM options which can be exercised at any time during their lives, so-called ''American style'').
The logical question here is, why am I not busily doing a whole lot of this trade as described? It's the next thing to free money, right? Well, sort of. I'm not doing this trade because, to do just 1 lot, buy 1 SPX and write 1 700 call, requires on the order of 750 points, $75,000. 750 points to make 3-and-a-fraction points BEFORE commission costs, call it $300 net? How crazy do I have to be, please?
However, there are people like this, who WILL do this trade (pretty entusiastically, too), and this is proven by the fact that -- would you believe? -- 2800 lots of the SPX 700 call traded on Friday. Hey, more power to these guys; I believe I'll just have another beer and watch, thanks.
All right. Now, all we have to do is explain why the open interest in the 700 calls and 700 puts is so high. It is high, too -- 61830 in the 700 call and 116961 in the 700 put -- these are enormous figures for an option strike 700-odd pts away fr/the market. By comparison, the 800 strike -- nearer the market! -- has an OI of just 100 calls and 31211 puts (SP puts almost always have a higher OI than the same strike calls, for strikes below the market...but that's a different topic).
There are two possible reasons that I can see for this situation to exist. First, and far and away most likely, is that some few weeks ago, some major player(s) found an arbitrage play in these options, most likely a 3- or 4-legged play involving one or two other contracts in addition to the 700-strike September SPX. This, for those unfamiliar with arbitrage trading (the location of one or more mispriced assets, and the subsequent trade of other, ''correctly'' priced assets against the mispriced ones), is perfectly common, even day-to-day ordinary in a number of markets.
The second, particularly regarding the calls, in an early unwind. Suppose that some major player(s) had -- in, say, April or May -- put on a position in the October SPX options, and suppose said player(s) have come to be worried about the position, expecting perhaps serious volatility through the rest of September. By executing a trade in the 700 September calls, the player(s) can (it depends on just what their original position is/was, but, trust me here, they'll be able to compute the correct way to do an early unwind) reduce their future risk considerably.
Presumably in this case, the person(s) who buy the options our hypothetical player(s) wrote will exercise them (with the player(s) as a result thus having a short position in the September, the player(s) will exercise their October options, thus acquiring a long position in December SPX (yes, October options are offset into the December contract, but, again, that's another topic), repurchase the short Septembers they received courtesy of option exercise, and sell some other instrument in order to hedge the Decembers and reclaim some (all?) of their cost on the September hedge.
Yes, this is complex. No, don't try this at home. But also, yes, this is exact how a lot of prop desks will manage certain types of trades.
I think the former possibility here is far the more likely.
Now, why don't these huge open interests in the 700 SPX September options forecast a ''bin Laden'' situation (what an asinine term, btw)? Because, if big player A ''knows'' that a replay of 9/11/2001 is on its way, you can bet your sweet ol' grandma that big players B, C, and D do, too.
And the way to profit from such a replay is to buy the puts, NOT write the calls. Why? Writing calls is expensive, very expensive, when they are deep-in-the-money (i.e. when the striking price of the call is way below the current market). Buying deep-in-the-money puts, conversely, is very cheap. Look at tonight's prices again, above. The 700 puts are .05 offered; that's just 5 dollars apiece.
Does it strike you as likely that, if A, B, C, and D -- big players all -- ''knew'' about an upcoming replay of 9/11, that the market-makers at the exchange would **still** be offering the 700 puts for a 'nickel', as we say?
Right you are. As George Bernard Shaw used to say: ''Not bloody likely.''
My net assessment of the article? One, the author needs a thorough course in options, because the text as written demonstrates very clearly that he/she is clueless; two, the author REALLY needs to source his comments, because A) he/she isn't qualifie to make them, and B) there is absolutely no shortage of pros on the exchange floor or at prop trading desks who can and will offer much more coherent commentary, and C) the ''substance'' (sic) of the article, that the action in ONE striking price in the huge SPX options market is a valid harbinger of a replay of 11 September 2001 is an absolute crock.
Good trading to you! (Market tip: don't listen to this putz for your trading ideas! Also...note that the article is unsigned? Hmmmmmnm??)
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.