Gold Foil Hat Apocalyspe next week... Help

August 25, 2007 4:49 PM

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. I've been doing this about 25 years. 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 invidual 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.via
posted by Huplescat (119 comments total)

PANIC!!!
posted by Henry C. Mabuse at 4:57 PM on August 25, 2007

Why shouldn't Osama make a few bucks on the side?
posted by stirfry at 4:58 PM on August 25, 2007

Because what you quoted is poorly written, I don't know what it's about or whether it's serious but I do get the sense that it is alarming. Please clarify.
posted by Shakeer at 5:00 PM on August 25, 2007 [1 favorite]

Yes, translation please.
posted by Zinger at 5:08 PM on August 25, 2007

Well, this article from a presumably somewhat reliable source describes it in less histrionic (but not really less worrying terms).
posted by lastobelus at 5:14 PM on August 25, 2007

As your google-groups link begins:
(from some looney website I forget where from...)

$1.78 Billion Bet that Stock Markets will crash by mid-September

Well. i'm convinced!
posted by dash_slot- at 5:15 PM on August 25, 2007

essentially, someone is betting in the neighbourhood of a billion dollars that the general market is going to be slashed by a third or more.
posted by lastobelus at 5:15 PM on August 25, 2007

Translation from someone who doesn't know too much about the market: Someone has bet HUGE that the market is going to tank at least 1/3rd by 9/21, a bigger and more general bet but in the same vein as the abnormally large put options placed on the airlines involved in the 9/11 attacks in the weeks before the event.

Please correct me if I'm wrong. I'll look for better articles, because unless this is waaay under the radar right now this post on an otherwise intriguing activity could have been done a lot better.
posted by rollbiz at 5:16 PM on August 25, 2007 [1 favorite]

I won't claim to know much about financial markets, but this seems like a statistical outlier for only one person or entity to make such a huge bet with what seems an incredibly small and risky payoff.

Small: If the market were to fall 30-50% — and that person knows about it and expects this to happen — you'd presumably see many more bets that would aim to capitalize from that condition, no? Half the GDP of the United States alone, not counting the EU, is roughly $7 trillion. A billion doesn't seem much of a profit, given the risk.

Risky: If the market were to fall 30-50% due to some catastrophic event — and that person knows about it — more bets placed out in different areas would be "noise" that covers up who has information about future conditions.

Put this in Mafioso terms: If you knew something significant was about to happen that would make you a good chunk of money, and something did happen, do you think that the folks behind the betting house would let you collect?
posted by Blazecock Pileon at 5:17 PM on August 25, 2007

Yes, translation please.

It sounds like somebody decided to short-sell the entire stock market.
posted by Avenger at 5:18 PM on August 25, 2007

Sorry, Shakeer... that quote came from somewhere around page eight of the first link. I don't begin to understand this stuff but, even so, it was a pretty compelling read... perhaps even more so because I don't get the fine points and those that do seem justifiably concerned.

I posted this in hopes that people here could make some sense of it.
posted by Huplescat at 5:19 PM on August 25, 2007

Blue horseshoe loves duct tape.
posted by Poolio at 5:21 PM on August 25, 2007 [9 favorites]

BP, as I mentioned above, it has happened before. Snopes says it's false, but look at the writeup: They base that determination on the 9/11 Commission Report which offered no reasoning for the abnormal trading.
posted by rollbiz at 5:21 PM on August 25, 2007

Approximately, what the odds of this bet, ie, what do they stand to gain for their risk?
posted by Brian B. at 5:23 PM on August 25, 2007

This is the funniest thing in the thread.

(if you don't want to waste time, it's listening to Bush's speech after meeting Gordon Brown in reverse and "hearing" things like "we had a big sneak out" and "praise the lie -- thank god", which apparently means Bush is planning a big fake terrorist attack)
posted by lastobelus at 5:25 PM on August 25, 2007 [1 favorite]

The problem with this stuff is that you can't really tell what's going on. It's not fully transparent; you only see some of the data. The hedge funds play very complicated games and without knowing everything they're doing, it's very difficult to understand. You can see people guessing in that forum thread.
posted by smackfu at 5:25 PM on August 25, 2007

Yes, OTB, I'd like to wager $1,000,000,000 each on 'Blue Horseshoe Loves Duct Tape' to win, to place and to show. I tells ya' One MBillion Dollars!
posted by ericb at 5:31 PM on August 25, 2007

Brian B.: It's impossible to say what they stand to gain. But we can say that unless the market tanks by 1/3 in the next month, they will lose everything. If the market drops by half, they will make a huge windfall. The farther under 700 the S&P 500 falls, the more money the bet would make.

But I don't see it. For the S&P to fall by 50% in a month would mean something incredibly awful was happening.
posted by Justinian at 5:32 PM on August 25, 2007

lastobelus, thank you for making this post comprehensible.
posted by brain_drain at 5:35 PM on August 25, 2007

Hmm, unless I'm missing something, though, I would guess this isn't someone betting the market is going to tank but rather someone who went long a while back and is basically cashing out.

Somebody owns a buttload (6.5 million shares) of SPX. They think this is the higest price will be for a while. Instead of just dumping the SPX stock someone sold 65,000 deep in the money contracts. They fully expect to have those contracts exercised, but they don't care because they think the price they day they sold the options is they best the price is gonna get.
posted by Justinian at 5:40 PM on August 25, 2007 [2 favorites]

(Note that they still think the market is headed for a rough patch so they're still bearish, but it's not a conspiracy of any sort. They basically just think the market wont go up until at least after the options expire.)
posted by Justinian at 5:41 PM on August 25, 2007

Note: this could just be one half of a split or straddle. Ameritrade doesn't know of a symbol called "SPX" so there isn't a good way to verify.

Admins - if you are going to keep this thread, you should undelete that Castro thread from the other day. This is tubgirl-flavored noise.
posted by b1tr0t at 5:43 PM on August 25, 2007

b1tr0t: SPX is just the Chicago Board Options Exchange symbol for the S&P 500 index.
posted by Justinian at 5:46 PM on August 25, 2007

Sorry all for the bunch of posts in a row. But I found the options:

symbol (open interest) ask bid ask strike price

SPZIT 61,730 0 0.00 747.00 777.70 782.90 700.0


That's 61,730 open contracts at a strike price of 700. Symbol SPZIT.
posted by Justinian at 5:49 PM on August 25, 2007

Worth pointing out that there are multiple big trades going on here -- SPY and SPX at least, I believe -- all basically covering a huge spread in the next month (i.e. a big crash before September).
posted by spiderwire at 5:53 PM on August 25, 2007

Yeah, two major possibilities I see (and I am by no means an expert):

1. What Justinian said -- someone cashing out or covering their ass

2. Black Swan style hedge -- they stand to gain huge if the market crashes but can hedge everything above that only paying transaction costs (which, given the size of the trade, they probably get a good deal on), and can keep playing out the position at a marginal loss until the market crashes (which isn't a bad bet) and then win big.
posted by spiderwire at 5:55 PM on August 25, 2007

So is anyone other than a bunch of newsgroup and internet forum people actually analyzing this?

I mean, if this were actually a big deal, shouldn't there be something in, say, the WSJ or the FT about it?
posted by dersins at 5:57 PM on August 25, 2007

The open interest alone isn't useful without knowing that there *isn't* a corresponding inverse position someplace - either a portfolio that maps well to SP that this is hedging, or a set of options that would have canceled this set, had the market price stayed constant (or diverged wildly). Or maybe something else entirely.

Without actually knowing the portfolio held by the people who bought and sold these contracts, we can't really infer what bet they were making. The claims being made here are a bit like finding someone walking down a street several miles from a forest with a box of matches in his pocket, then concluding that he intends to burn the forest down. That might be the case, but it also might not.
posted by b1tr0t at 5:59 PM on August 25, 2007

b1tr0t, the interesting thing to me is that the put contracts are so huge and across the board -- it's genuinely weird.

Someone has a 7B euro set of put options on the Eurostoxx 50 and someone (maybe the same entity) has a nearly $2B set of put options across the entire S&P -- both covering a huge spread in the next month.

Even if the position is hedged (and you'd have to imagine it is) it's extraordinarily strange.
posted by spiderwire at 6:04 PM on August 25, 2007 [1 favorite]

Well, this article from a presumably somewhat reliable source describes it in less histrionic (but not really less worrying terms).

Except that article is saying someone put a huge put on SX5E (the DJ Euro 50) not SPY, (SPDR, based on the S&P 500.)

First, option terms. A put option, when sold, sells the right but not the obligation to sell something at a given price in the future. The seller is obligated, if the option is called, to make the sale at the option price. Buying a put says you're betting on a drop, and selling one says you're betting it won't. There's a premium involved, namely, the cost of the option -- so if the price doesn't move, the buyer loses a bit. If the price goes up dramatically, the buyer doesn't exercise the option, which mens the buyer loses the entire price of the option - but no more.

Call options involve the right to buy at a given price. People buying calls are betting on a market rise, people selling (often termed "writing") the option are betting on a fall.

So, someone (or someones) has bought 280K puts @2800 on the SX5E, currently trading at 4238. That's a huge bet on a huge drop, and I'd imagine finding peope to write that option was trivial. Given the margin, the SX5E is going to need to drop to around 2750 to make those options pay.

Now, today, someone is selling very low calls -- 65 to 95 -- on the SPY, which is currently at 144, and they apparently sold 120K worth of them, 10K at 65 through 10K at 95. Selling a call is just like buying a put, it's a bet on the downside...BUT.. It's insane behavior.

To cover those calls, the writer needs 120K SPDR -- current value, $2 *billion*. If the market doesn't tank, the seller better be holding them, or they're well and truly screwed.

Writing a call without holding the item in question is a "naked call" -- and if the price climbs, you're really fucked, because when the buyer excercises the option, you have to buy the item at market price, and then sell it to the option holder at the strike price.

If the SPY is still at 140, everyone who bought those calls will be executing them on 21-Sep -- hell, that guy who bought the 65s is looking at around $800K in profit if the SPY hold steady.

So, why the hell do you write the calls? If the market does drop, you've made the premium, but that's it -- nobody buying is going to execute a 95 call if the market is at 50. If it doesn't, you're out $2B -- or more, if you're naked and the SPY is rising.

So, on the market, we have two very, very large bets on the markets -- both EU and US -- tanking, as in 1929 tanking.

The only guess I could make -- someone's desperate, they're running a huge amount of money, they're facing a margin call from hell come September, and they're betting it all on 00. But that SPY action still doesn't make sense. How the hell does the writer make any real money on it? That much of a long shot needs a long shot payoff.
posted by eriko at 6:05 PM on August 25, 2007 [5 favorites]

Snopes says it's false, but look at the writeup: They base that determination on the 9/11 Commission Report which offered no reasoning for the abnormal trading.

Snopes says things a little differently, from my reading:

A single U.S.-based institutional investor with no conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy that also included buying 115,000 shares of American on September 10.

It doesn't seem clear if this particular investor has bets placed elsewhere, either, which may offset the bet Huplescat is concerned about.
posted by Blazecock Pileon at 6:05 PM on August 25, 2007

I read somewhere once that a magazine which still publishes today claims to have printed six weeks prior to the 1929 stock market crash that foreign investors (they cited Germany if memory serves) were shorting corporate interests in North America. I thought it was Newsweek, but I just checked and they didn't start publishing until the 1930s. Anyone remember the magazine I'm talking about?

Anyway, when we pull out of Iraq, it'd only make sense that certain mideast interests would pull their financial support out of the west. The planet's a lot smaller nowadays than most people want to accept.

I'm not saying this with any political or religious agenda. I don't hate or love Christians or Muslims or Jews any more or less than the others. I don't care anymore. It just looks to me that America went into the middle east because powerful people over there told us to, and Bush's administration was told to convince the American people it was our idea, and they had about as much luck doing that as the Coca Cola company did in convincing us fructose corn syrup is just as good as cane sugar.

It's the only theory I got left that makes sense. I don't know who. Saudi Arabia? Egypt? Israel? Who over there doesn't hate Iran? The point is, the executive branch of the US gov't is not taking orders from the American people. Their orders are coming from somewhere much more influential, with much more money, and when you stop following the orders of something like that, they pull the rug out from under you. Follow the money.

Is that what's happening here? Nah. I'm probably full of it. I don't know what I'm talking about.

Bill Gates did it as a joke to make his wife laugh. Is that a better theory? Whatever helps you sleep at night.
posted by ZachsMind at 6:08 PM on August 25, 2007 [1 favorite]

Um, I just instantiated a Quake server.

Does it ever bother anyone that enormous power is exercised by a few people? Like, planet-wide?
posted by sidereal at 6:09 PM on August 25, 2007

You mean the rich?
posted by smackfu at 6:12 PM on August 25, 2007

Bill Gates did it as a joke to make his wife laugh. Is that a better theory? Whatever helps you sleep at night.

My money is on Cubans celebrating Castro's death.
posted by b1tr0t at 6:13 PM on August 25, 2007

eriko, thanks for the info.

what kind of influence does just making trades like this have on the markets when people are worried already? Is it big enough to create some degree of self-fulfilling-prophecy effect?
posted by lastobelus at 6:16 PM on August 25, 2007

Anyway, when we pull out of Iraq, it'd only make sense that certain mideast interests would pull their financial support out of the west. The planet's a lot smaller nowadays than most people want to accept.

I'm not questioning your broader point of perhaps the American Government answers to "higher" power than those who elected it, but what indication have you seen we're pulling out of Iraq anytime soon? The administration plan of the endless punt shows no sign of losing its effectiveness...
posted by jalexei at 6:17 PM on August 25, 2007

I think Justinian is on the right track. This looks like a hedge fund protecting a long position.
posted by [expletive deleted] at 6:18 PM on August 25, 2007

A single U.S.-based institutional investor with no conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy that also included buying 115,000 shares of American on September 10.

In 2001, before 9/11, that was a good bet. UA was in trouble, bad debt structure and not having a good time with the unions (google up "Summer From Hell".) AA had all the contract work done, and just put big orders on 777s and 737s in place. That guy was betting that AA would do better than UA.

He was right, oddly enough -- but he got creamed anyway.
posted by eriko at 6:20 PM on August 25, 2007

"..with no conceivable ties to al Qaeda.."

Sounds like someone's never heard of e-mail. It's very conceivable.
posted by ZachsMind at 6:22 PM on August 25, 2007

"what indication have you seen we're pulling out of Iraq anytime soon?"

Isn't that whole thing being re-evaluated yet again when Congress comes back into session? Isn't that September? Is there a single American still buying the Bush Administration's load of decayed skinned rabbit carcasses?

Don't mind me. I'm a hermit who lives in an undisclosed location. I don't know Jack. That Castro Cuban theory sounds just as plausible. Let's go with that.

Or maybe it's Mark Cuban! That sly dog!
posted by ZachsMind at 6:28 PM on August 25, 2007

Hmmm, on further consideration -- it doesn't seem like someone's expecting a crash or a terrorist attack, since these puts are in the U.S. and European markets.

It sounds like someone just got a huge chunk of cash to place on what they think is a sure bet somewhere in Asia.

Another possibility, e.g., is that someone got the hint that China is planning on doing something big in the next month -- the put options are intrinsically hedged against the U.S. and European markets, so if someone make a bundle on whatever happens in Asia, it makes sense that you'd take the capital to fund it this way. Hell, given the size of the spread, you probably wouldn't even need much capital to back it.
posted by spiderwire at 6:28 PM on August 25, 2007

A single U.S.-based institutional investor with no conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy that also included buying 115,000 shares of American on September 10.

If you had prior knowledge of the 9/11 attacks why would you buy puts on UAL? That would be a dumbass move when S&P puts would do just fine, and of course it would be much more anonymous.
posted by storybored at 6:34 PM on August 25, 2007

Oh come on, people.

The date of the Financial News article is Aug 16, i.e. a week ago last thursday, when the Dow intraday was down 340, but probably before it snapped back to positive territory late in the afternoon, only to rally on Friday and this whole week. The article says the trades were done on Tuesday or Wednesday of that week, right in the middle of the bloodbath

And for someone "doing this 25 years" that guy must suck at it.

We are talking about options, not stocks. The best way to think of these things is having a time component and price component. If the Eurostoxx is at 4100 and you buy puts at a strike price 2800 , this is a way out of the money hail mary bet.

But it isn't a bet that Eurostoxx 50 goes from 4100 to 2800. IT is merely a bet that it goes from 4100 to, say 3700 (i.e. down about 10% which is very possible) in a few days after he buys them.

By the way, that far out of the money, the options are going to cost probably about 0.10 per contract. 2800 down from 4100 is about 32%. For comaprison, the SPX 1000 (about 32% below the current S&P price) is trading at 0.10 per (usually they sell in blocks of 100, so that $10. So 280,000 contracts will cost $2.8 million. Chump change for a hedge or mutual fund.

The options may appreciate 25%-30% on that move, and then he sells them. It's a standard way of basically buying insurance. The problem he has is that if it goes sits at 4100 for two weeks, and then goes down to 3700, that 25-30% is going to shrink. Because options so close to expiration that far out o the money are going to lose value with each passing day that doesn't bring the price any closer to the strike.

This means nothing. This is Wall Street Timecube.
posted by Pastabagel at 6:35 PM on August 25, 2007 [9 favorites]

If you had prior knowledge of the 9/11 attacks why would you buy puts on UAL? That would be a dumbass move when S&P puts would do just fine, and of course it would be much more anonymous.
posted by storybored at 9:34 PM on August 25

In fact, shorting the airlines would be particularly stupid, as companys halt their trading all the time for far less than a hijacking. I could have transpired that AA or UAL, upon recieving word of the hijacking, could have halted the trading of their stock. The rest of the market would have been open (and tanking) for a bit longer, but not the airlines.
posted by Pastabagel at 6:45 PM on August 25, 2007

The options may appreciate 25%-30% on that move, and then he sells them.

He's betting a couple of million on a 10% drop in three weeks, to make a couple of million, by going that deep?

I don't think so -- it's *too* deep. If he'd bought 3500, banking on a 10% drop, then he's got a very movable option.

The time play is too short for 2800. But at least the puts on the SX5E make sense. The SPX/SPY action is what's bothering me (and the reason that it's bothering me is that I don't see how it makes any sense. Yes, I know the market is often irrational, but.)
posted by eriko at 6:48 PM on August 25, 2007

Pastabagel, how do you know that the person buying those contracts has the right to sell anytime? If they're European-style options, they'd have to hedge them elsewhere first, which means more contracts and more overhead.
posted by spiderwire at 6:51 PM on August 25, 2007

Pastabagel, you're talking out of the money puts, while I believe the post is about deep in the money calls. Just to clarify, as some people earlier seem to have confused them.

Anyway, maybe it's worth remembering that whatever the people who sold them were thinking, the people who bought them also have a rather big bet on a different outcome.
posted by sfenders at 6:52 PM on August 25, 2007

I agree that the SPY contracts are esp. weird -- look at the breakdown about midway down this page of the linked thread.
posted by spiderwire at 6:55 PM on August 25, 2007

Good stuff, pasta.

People should realize that bearish option strategies like buying put options or writing calls is a reasonable bet to make given the current circumstances.

We're in the middle of a liquidity crisis where dozens of financial companies are going out of business. The debt markets are screwed up something bad. Uncertainty and panic are probably just a few bad trading days away. Buying some puts, good grief, why the hell not?
posted by storybored at 6:55 PM on August 25, 2007

This isn't just a put, it's a bet that the entire market will drop at least 35% in the next month -- if it doesn't, the person buying the put options makes nothing. That's why it's weird. Even if you were betting on the market going south this isn't the position you'd take.
posted by spiderwire at 7:00 PM on August 25, 2007

**sorry, as sfenders points out, selling call options
posted by spiderwire at 7:05 PM on August 25, 2007

Spider, Justinian wrote a good explanation:

"Somebody owns a buttload (6.5 million shares) of SPX. They think this is the higest price will be for a while. Instead of just dumping the SPX stock someone sold 65,000 deep in the money contracts. They fully expect to have those contracts exercised, but they don't care because they think the price they day they sold the options is they best the price is gonna get."

If the stock market doesn't tank, they cash out their stock position at effectively the current price. If the market falls, they can buy back the calls at a lower price. If the market deep sixes, they walk away with the premium.
posted by storybored at 7:12 PM on August 25, 2007

...since the written call limits your profit on the downside to the premium. So if Justinian's scenario is correct, this is not a superbearish strategy.
posted by storybored at 7:14 PM on August 25, 2007

I put all my money in cardboard.

I bought at fourteen cents a ton.

Today, it's trading at sixteen cents.

I bought two tons.

You do the math.
posted by mr_crash_davis at 7:16 PM on August 25, 2007 [1 favorite]

sfenders- you know, you're right. I was referring to this article that lastobelus linked to above. The links in the post were so full of gibbering lunacy that I subconsciously substituted the more rational financial news link.

The end result is the same, though. You're shorting the calls and then buying them back, you are not shorting the underlying asset, which is much more expensive.

The funny thing about that week of Aug 11 was that Wall Street was unanimous in what they wanted, a discount rate cut by the fed. It was pretty much accepted that the fed would do something eventually, but the question was when.

If you shorted the S&P or the dow (shorting, buying puts, same difference because of how you close the trade) during that week, you were doing so with literally a 2-3 day time horizon. At the latest, you were going to push it until Monday the 17th, because mondays are statistically more crash-prone than other days. You sure as hell aren't going to put on that trade until September expiration. You're looking for S&P down 4-5% in three days (or about 15% on your options trade) and then close the trade out because the Fed was coming to the rescue.

In fact, if you want conspiracy, I've got a conspiracy for you. The fed cut the discount rate on Friday. So how the hell did the banks and brokerages, which were poison since the end of July, rally in the last hours into the close on Thursday? Did someone know something about the rate cut in advance?
posted by Pastabagel at 7:17 PM on August 25, 2007

If the market falls, they can buy back the calls at a lower price.

Sure, but the strike is 2800. That makes no sense at all -- why throw away the contract price?
posted by spiderwire at 7:22 PM on August 25, 2007

This is getting confusing :-). Are we talking about the Euro story or the S&P story? The S&P strike price is 700 (call options)
posted by storybored at 7:26 PM on August 25, 2007

Also, if someone owned a ton of shares of SPX, this still wouldn't make sense, because you'd still be losing the value of the underlying -- it would only make sense as a spread option. At least as a naked call it's only a bad bet.
posted by spiderwire at 7:29 PM on August 25, 2007

Sorry, yes, 700. Still ridiculously low -- S&P is at about 1400 right now.
posted by spiderwire at 7:31 PM on August 25, 2007

Hmm okay how about this? Let's just use one contract as an example. Assume I currently hold long in shares the equivalent of one contract. I write 1 S&P call, strike price of 700. For that I get $750 per share.

If the buyer of the option chooses to exercise the option at any time before expiration date I give him the shares for $700 each. Add the $700 to $750 and I walk with $1450. So I wouldn't be losing the value of the underlying...

If the S&P falls below 700, the call expires worthless. I get to hold on to my shares, and I have $750 to sooth the pain.
posted by storybored at 7:39 PM on August 25, 2007

$1450 per share. (I should say) (it's getting late, brain is shutting down)
posted by storybored at 7:41 PM on August 25, 2007

...maybe it's just because I misunderstand call options, but the option is merely the right to buy at the strike price at/before the expiration date. The share doesn't move unless the contract is exercised -- the buyer pays the option price/premium -- which should be relatively low -- not the strike price.

The way you're phrasing it doesn't make any sense -- in your scenario the contract buyer is spending $750 (or $1450, whatever you mean) for the right to buy the underlying at $700 at expiry -- that's the opposite of the seller locking in the price, that's the buyer locking in the price.
posted by spiderwire at 8:04 PM on August 25, 2007

Is anyone else caught in between Trading Places and Casino Royale right now?
posted by dismas at 8:06 PM on August 25, 2007

--should be $750 for the right to buy at $700,000/contract at expiry. You get $750/contract, not $750/share.
posted by spiderwire at 8:08 PM on August 25, 2007

SOON, WE'LL BE LIVING IN CARDBOARD CONDOS AND MCD WILL BE A VERY RICH MAN.
posted by quonsar at 8:09 PM on August 25, 2007

the upcoming crash won't affect me, i'm a dutch tulip magnate
posted by spiderwire at 8:14 PM on August 25, 2007 [4 favorites]

Maybe one of the failing lenders is cashing all their chips in on a long bet: that they can use the collapse of the market sparked by them in the first place can turn what looks like it's going to be a massive failure, into massive salvation.

Of course, that just moves the pain further afield. Someone's gotta pay in the end. But from the POV of the culprits who are running these operations, it's a pile of money for themselves.
posted by five fresh fish at 8:21 PM on August 25, 2007

Sorry I guess i'm adding to the confusion here rather than reducing it. I trade options on stocks rather than indexes so I'm a little fuzzy on the multipliers so let's just talk contracts.

in your scenario the contract buyer is spending $750 (or $1450, whatever you mean) for the right to buy the underlying at $700 at expiry


The contract buyer is spending $750 for the contract. The contract allows the buyer to buy at $700 strike. The contract is worth $750 because the market value of the index is $1450.
posted by storybored at 8:24 PM on August 25, 2007

Fuck it, this is confusing, I'm buying ammo and booze.
posted by Justinian at 8:25 PM on August 25, 2007 [1 favorite]

I understand really pretty close to nothing about this. Futures, options, puts, whatever. All meaningless to me. Therefore, can I ask from a position of complete ignorance - could something like this be intended to make the market crash? Is the person doing this aiming to make everyone all jittery and worried in the hope of creating a self-fulfilling prophecy?
posted by Jimbob at 8:27 PM on August 25, 2007

It just looks to me that America went into the middle east because powerful people over there told us to

Funny, it looks to me that America went into Iraq (I assume this is what you're talking about?) as part of an explicit strategy openly conceived by Neoconservatives (Project for the New American Century et al.), in the belief that it was a tactical necessity to maintain dominance in Middle Eastern politics.

These people articulated this position well prior to the presidency of George W. Bush but not embraced by anyone in power until him and politically impossible until the act was falsely conflated with the coincidental terrorist attacks of 9/11/01 and dressed up with false reportage of Iraqi weapons capabilities in the rancid yogurt filled brains of my fellow Americans, but the administration was planning and attempting to drum up support for that war well before this.

Read about PNAC. Read about the architects of the war. Read about the events leading to the invasion of Iraq. Why is a conspiracy theory, some shadowy puppet master, when the conspiracy is right out in the open, well documented and much discussed?

These people believed we would win, believed we would control and from their would weaken Iran and Syria from a position of strength. That's what they said, that's what they planned on, these are the plans they executed. Why is this so hard to believe? Because it's fucking stupid and the outcome has been predictably horrible? Jesus, read about Vietnam, read about the "best and the brightest." Certainly many of the architects of the war are heavily invested in the interests of Israel and believed they were serving them and that is where middle eastern influence ends. Nobody else even remotely wanted us over there.
posted by nanojath at 8:32 PM on August 25, 2007 [9 favorites]

Prior to reading this thread I would have said I have an above average knowledge of capital markets - but this discussion is so far over my head, it is scary.

But I have said it before here and I will say it again - don't worry about the world ending tomorrow - it already is tomorrow here in NZ.
posted by Samuel Farrow at 8:36 PM on August 25, 2007

Oh good, let's argue about the Iraq war in this thread now.
posted by smackfu at 8:37 PM on August 25, 2007 [1 favorite]

the upcoming crash won't affect me, i'm a dutch tulip magnate

Nor me. I'm still holding on to options, warrants, shares and units of Boo.com, eToys.com, Flooz.com, Go.com, GovWorks.com, Kibu.com, Kozmo.com, MVP.com, Pets.com and Webvan.com.

Suck it suckers!!! I'm goin' be RICH, I tell ya,' R-I-C-H !!!
posted by ericb at 8:47 PM on August 25, 2007

Fuck it, this is confusing, I'm buying ammo and booze.

Well call options on Sept. ammo are currently $2-$3 bid ask.
posted by storybored at 8:49 PM on August 25, 2007 [1 favorite]

Ok, just to clarify, i poked around into the multipliers for index options.

The multiplier is $100. The 700 strike call option selling for $750 is worth $75,000.

It makes no sense to talk about "shares" in the context of index options. I confess, my brain was addled at the time. But I'm all better now.

But it also means the FPP is wrong. 65,000 contracts doesn't "control" 6.5 million shares. 65,000 contracts are worth $4.875 billion is what you can say though.

The options doctor is in.
5 cents please!
posted by storybored at 8:59 PM on August 25, 2007

I'm in the same boat as Jimbob. Whatever this thing is, it seems like a really provocative gesture. Why can't the person/s behind this be traced? Is there any precedent for trading on this scale? Help out a prole- I'll send your wisdom onto Miss S. Carolina so's she can explain the big words to me.
posted by maryh at 9:07 PM on August 25, 2007

The SEC can trace these things, but they don't tell us.
posted by smackfu at 9:13 PM on August 25, 2007

Storybored - the bit about "controlling" 6.5 million shares is a result of the fact that each options "contract" is a contract that involves 100 shares. So 65,000 contracts at 100 shares a contract = 6.5 million shares involved... if the contracts are exercised. Contracts are (usually) not exercised. They usually expire worthless or are bought back by the issuer so that they don't lose the underlying securities.

Assuming they have the underlying securities, that is. You can sell options on margin.

What happens if someone exercises an option to buy 6.5 million shares of a security from you at considerably less than market price and you don't actually own any of the security is left as an exercise for the reader. Talk about a margin call!

Selling uncovered (as in, you don't actually own any of the stock you're selling someone an option to buy) calls is not for the faint of heart.
posted by Justinian at 9:18 PM on August 25, 2007

maryh - It's not really that provocative... if, as I allude to in my previous post, these are "covered" calls. That is, assuming whoever sold the calls actually owns 6.5 million shares of SPX. All that means is that they made a bunch of money in SPX and they are willing to liquidate their position in the next month.

Where it becomes provocative is if the calls are "uncovered". That is, if someone sold other people the right to buy 6.5 shares from them... and they don't own 6.5 million shares. If the market doesn't crash they would be left holding the bag in an enormous way.

I must imagine the former scenario is the case. A big institution seems a stagnant or down market for a while and is cashing out, not betting the farm on a crash in the next month.
posted by Justinian at 9:21 PM on August 25, 2007

So, were not panicking, right?
posted by jaronson at 9:25 PM on August 25, 2007

What? Of course we're panicking. I'm buying the ammo and booze, aren't I?
posted by Justinian at 9:48 PM on August 25, 2007

*studiously notes Justinian's preferences for booze and ammo for future reference*
posted by maryh at 10:22 PM on August 25, 2007 [1 favorite]

Yeah, sorry, $700,000 = me is bad at math. We dutch tulip magnates mostly deal in horticulture.

OK, so my understanding is this:


We have 65,000 call option contracts here selling at ~$750 per share, each contract controls 100 shares and has a strike price of $700. All told, those contracts net seller $4.875B, ignoring transaction costs.

The call option gives the buyer the right to purchase at the strike price at expiry -- so $700/share.

Assuming the stock price stays the same ($1450/share), at expiry seller has to sell each share at $700, canceling out the initial gain -- because each transaction is a loss of $750 on the share it held (assuming it held the underlying -- otherwise it has to cover the margin). Seller essentially breaks even if it holds the underlying.

Stock price goes up, seller has to additionally cover that margin (current price - $1450)(6.5MM).

Stock price drops below $700, seller pockets the difference ($700 - current price)(6.5MM).

Is that all correct?
posted by spiderwire at 10:51 PM on August 25, 2007

Justinian, you're also assuming that they're not able to hedge the calls in the next month. Even if the seller doesn't hold the underlying, if these contracts could be sufficiently hedged the seller could still profit on a large market drop, or at least not get taken to the cleaners. One imagines it would be difficult to do that covertly, though.
posted by spiderwire at 10:54 PM on August 25, 2007

Stock price drops below $700, seller pockets the difference ($700 - current price)(6.5MM)

Wait, this is wrong assuming seller holds the underlying. In this case they lose money.
posted by spiderwire at 10:59 PM on August 25, 2007

We dutch tulip magnates mostly deal in horticulture.

I heard tell that was legal in Amsterdam.
posted by ROU_Xenophobe at 11:44 PM on August 25, 2007 [1 favorite]

Darn time travelers.
posted by MrVisible at 12:25 AM on August 26, 2007 [2 favorites]

I heard tell that was legal in Amsterdam.

Shhhhh! They think the market's collapsed! Do you know how long we've worked to get the tulip thing into all those economics textbooks? You'll ruin everything!
posted by spiderwire at 12:46 AM on August 26, 2007

Sad thing is, ammo costs have risen by at least 15% (regardless of caliber) in the past couple of months, and the consumer price for .223/5.56mm has skyrocketed due to most of the production heading to Iraq/Afghanistan. I'm going to have to buy a .22LR kit for my AR15 because I can't afford to shoot 5.56 right now.
posted by mrbill at 12:56 AM on August 26, 2007

I'm buying ammo and booze.

I'm buying options on ammo and booze.
posted by ryoshu at 3:01 AM on August 26, 2007 [1 favorite]

This fund has exactly this kind of trading strategy.
posted by patricio at 3:47 AM on August 26, 2007

I'm buying booze and booze.
posted by stavrosthewonderchicken at 4:58 AM on August 26, 2007 [1 favorite]

There is an ammo shortage in the US at the moment, and I think globally, because we are using so freaking much of it in Iraq. Our soldiers are even conserving it, I hear. Police departments can't get enough to train with. Going long on ammo would seem a good idea in this world.

So add another indirect cost to the war: our wonderful cops won't be able to shoot straight and will kill even more innocent minorities carrying dark wallets or driving while black. Or maybe not being able to shoot straight will mean the opposite, since they won't be able to hit their "accidental" shooting victims and won't want to waste, say, 41 bullets on one guy. If only Amadou Diallo had come to the US a few years later.
posted by fourcheesemac at 5:20 AM on August 26, 2007

Going long on ammo would seem a good idea in this world.

Won't help the Iraqis, but if it'll keep ted nugent off my lawn, I'm good with it.
posted by maryh at 6:08 AM on August 26, 2007 [2 favorites]

Get with it people....this is the US of A. IF and I say it again...IF the market tanks....the very next day buy big and hold on for the ride of your life.

Second this country will never run out of ammo, hell I imagine we little people have enough stock piled in our basements, just for hunting season, that could take out one half the world.

Finally...remember in chaos there is profit.
posted by malter51 at 8:40 AM on August 26, 2007

If the Eurostoxx is at 4100 and you buy puts at a strike price 2800 , this is a way out of the money hail mary bet.

That would be absolutely true. However, the article claims that the people involved did not buy puts deeply out of the money, they sold calls deeply in the money.

This is quite different: it's equivalent to selling a quantity of the underlying security and buying out of the money puts. In particular, that means that they stand to make money immediately as the market goes down.


I have some knowledge of this -- I wrote option models for a major investment bank which involved hanging out on the trading floor quite a bit -- so here's my analysis.

Selling such calls is, in terms of your exposure to the market, almost identical to simply selling the underlying security; there's a slight difference inasmuch as you stop making more money once the index sinks below 2800, but at that point you'd be safe to assume that you'd accomplished your objective.

(In fact, there's a second order effect that would work against you -- if the market dropped so precipitously, the volatility used to price the calls that you sold would increase, and so would their price, so you'd lose a small portion of your profit if you wanted to unwind your position early.)

So there's no reason I can see in terms of the pure financials that would lead you to sell the calls rather than the index itself.

Moreover, it's inevitable that the market on the underlying security is much more liquid than the market on its options. So there's no trading reason to sell the calls either. And your trade stands out more in the smaller market too.

It's not even the case that you preserve the underlying market from the effect of your sale -- due to the inexorable operations of market makers and hedgers, your trade is going to have very close to the same downward force on the market that selling the underlying would.

So I have to assume that it's being done for some sort of accounting or regulatory reason that's unclear to me. That sort of thing happens all the time.

Perhaps someone has a large position they need to hedge but they are not allowed to short futures. Such conditions are very common for fund managers and government traders. It's a little strange to believe that someone would be allowed to sell calls but not allowed to sell futures, but traders have weirder conditions than that all the time.


Overall, even though I am desperately worried about the state of the world and the financial markets, I can't find a way that this specific set of trades represent a danger signal over and above a simple sale of the Euroindex would.

Who ever is doing this is selling calls, so they're selling volatility, only a little because the calls are so much in the money, but they're still partly making a bet that volatility in the market will go down. It seems unnatural to me that you'd short volatility if you really expected the market to go crazy.
posted by lupus_yonderboy at 8:49 AM on August 26, 2007 [3 favorites]

Going long on ammo would seem a good idea in this world.

This is actually quite funny. I can imagine someone being told to buy ammo to survive the end of times, and they buy ammo stock instead.
posted by Brian B. at 9:28 AM on August 26, 2007

No, no -- going long on ammo is going long on ammo futures -- purchasing futures in the ammo commodity market (were there such a thing) and then later accepting delivery of a boxcar full of ammo.

Hopefully, you'd time the expiration of the futures contracts just right so that you got delivery while there was still a working economic system.
posted by lupus_yonderboy at 10:35 AM on August 26, 2007

Can someone maybe explain this "in the money" / "out of the money" thing? My Comp Sci / English background isn't letting me make any sense of it.
posted by thecaddy at 1:20 PM on August 26, 2007

Options definitions here.
posted by b1tr0t at 1:23 PM on August 26, 2007

The only things I've come out of this discussion with is that I'm jealous of lupus_yonderboy in some vague, inarticulate way, and that I would like to see the movie Gold Foil Hat Apocalypse Next Week.
posted by nanojath at 3:43 PM on August 26, 2007 [1 favorite]

Can someone maybe explain this "in the money" / "out of the money" thing?

Check out this tutorial
posted by storybored at 6:02 PM on August 26, 2007

Spiderwire: Stock price drops below $700, seller pockets the difference ($700 - current price)(6.5MM). Wait, this is wrong assuming seller holds the underlying. In this case they lose money.

If the stock price drops below $700 to some price p, then the seller walks away with $750 from the written but unexercised call. Meantime he takes an unrealized hit $700-p on each underlying share.

(Still not completely comfortable with the use of "share" here, because the underlying is an index...)
posted by storybored at 6:10 PM on August 26, 2007

billion $$$ says the housing bubble will burst. Subprimes were just the beginning........
posted by Kali at 8:42 PM on August 26, 2007

Naked calls = unlimited losses, so I need to pay close attention to this market and have a means of fast execution. I like gold as a hedge, gold that I can put my hands on. The out of the money puts does seem to be a good cheap bet. The most they will do on the down side is expire. Do I have a small understanding of how to play this?
posted by Rancid Badger at 8:55 PM on August 26, 2007

No, kidding? Do tell me more. *cups chin in hands, pays rapt attention*

In other breaking news, water is wet.
posted by stavrosthewonderchicken at 8:56 PM on August 26, 2007

(Sorry, that burst of sarcasm was directed at Kali, not Rancid Badger.)
posted by stavrosthewonderchicken at 8:57 PM on August 26, 2007

Did upping the Fed funds and taking mortgage back securities as collateral, reassure the markets and decrease volatility? Is this a statement that the Fed is determined to uphold the value of such securities?
posted by Rancid Badger at 9:05 PM on August 26, 2007

Stavrosthewonderchicken, you almost always make me laugh|
posted by Rancid Badger at 9:09 PM on August 26, 2007

So, anyone care to comment on the Fed dropping the lending cap for Citi and BofA?
posted by spiderwire at 9:13 PM on August 26, 2007

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

Options are by no means a sure thing; there is a probabilistic element not captured by the statement above.

At worst someone is BETTING that something might happen. At best they are HEDGING against the possibility that something (sorry to be pedantic here) might happen.

And the key issue here is, as others have noted, more than likely we're only seeing one side of the trade. It's highly unlikely this is an unhedged position. There is at least one, perhaps several other trades that, when combined with the trades noted here, comprise a structured product. Valuing such an instrument isn't as simple as noting in / out of the money.

The overall market exposure isn't as high as this post leads one to believe. It's also highly likely the other side of this trade isn't listed options. Its also conceivable the other side of this trade could be a different asset class.

This isn't that large a position as these things go, and it seems like some of the folks on tickerforum are getting all excited over what is business as usual on many desks (i.e., billion dollar positions).

In any case, only one market participant knows for sure, and that individual hasn't and probably won't be posting on the internet to explain their strategy.
posted by Mutant at 1:53 AM on August 27, 2007 [1 favorite]

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

The Federal Open Market Committee has its next meeting on Sept. 18...
posted by umop-apisdn at 6:34 AM on August 27, 2007

Either way, I feel safe and comfy suspended as I am in a giant bag of put options.
posted by storybored at 8:09 AM on August 27, 2007

So, anyone care to comment on the Fed dropping the lending cap for Citi and BofA?

Yeah: that's some bad shit, yo. RIP, Glass-Steagall.
posted by Asparagirl at 7:12 PM on August 27, 2007

Oh, and if anyone's still interested, the explanation for the trade has come out:

(from www.thestreet.com)

"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."

Box Trades
posted by patricio at 3:05 AM on August 31, 2007 [4 favorites]

Thanks, patricio... I picked up this thread on Reddit, now its bounced back there. The comments are interesting.
posted by Huplescat at 3:13 PM on September 2, 2007

comments
posted by Huplescat at 3:18 PM on September 2, 2007