-Caveat Lector-
Begin forwarded message:
From: [EMAIL PROTECTED]
Date: August 30, 2007 11:49:26 PM PDT
To: [EMAIL PROTECTED]
Cc: [EMAIL PROTECTED], [EMAIL PROTECTED], [EMAIL PROTECTED]
Subject: Rumors of a "Bin Laden Bet" on Wall Street -- Maybe Yes,
Maybe No
Note that no unequivocal debunking occurs below.
Just "hedging one's bets," as traders are wont to do.
Dispelling the 'Bin Laden' Options Trades Myth
By Steven Smith and Aaron L. Task
Staff Reporters
8/30/2007 3:23 PM EDT
http://www.thestreet.com/_email/newsanalysis/optionsfutures/
10377063_4.html
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.
<snip>
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 a <possible> 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.
Get a sneak peek of the all-new AOL.com.
www.ctrl.org
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