Bin Laden option trades interesting read

[chinaman711]

STREET PUT OPTIONS SIGNAL UPCOMING TERROR ATTACK
Post by Admin

Tuesday, September 4, 2007

$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.

"$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."

[Albert0373]

http://www.onlinetradersforum.com/sh...ad.php?t=14175

[rkahn]

If the market does not drop, the entity or individual involved stands to lose over $1 billion just for engaging in these contracts!

I thought put options were not binding - meaning that the owner does not have to sell at the price stated in the contract. Can anyone clarify this?

[chinaman711]

The options will expire worthless if the market does not tank. Someone made a huge bet on the market tanking.

[Svenwulf]

a veteran poster on another thread made a great point about all this rumor: 700 million in protection is a nice chunk of change, but if you run, say 10 billion, this transaction might become more understandable. there are several plausible explanations that in no way involve calamity. best wishes.

[aiki14]

Originally Posted by rkahn

I thought put options were not binding - meaning that the owner does not have to sell at the price stated in the contract. Can anyone clarify this?

The option to sell (put) is not binding but the contract has a premium, based on the price and time remaining to expiry. If you elect not to sell and the contract expires worthless, you're out the premium. Apparantly the entity involved (whose identity is secret by statute) has 700 mil in premiums. That's the downside, if the contracts come in the money they stand to make many times that.

[aiki14]

Originally Posted by Svenwulf

a veteran poster on another thread made a great point about all this rumor: 700 million in protection is a nice chunk of change, but if you run, say 10 billion, this transaction might become more understandable. there are several plausible explanations that in no way involve calamity. best wishes.

I can't get the open interest anywhere on this, but 700 points out of the money puts should be a penny or less. That would mean an open interest of 70 billion contracts.
I would like to see this in writing somewhere official.

[AJLightning]

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.



wouldn't the Feds/FBI, someone be questioning this "person" who got these options?

that wouldn't raise any flags?

sounds like some major inside infor.

it was probably Bush

yea i read that bin laden thing and I wouldn't be suprised if we got another terrorist attack in the U.S. Its a scary thought but it may happen. It would be awesome if a terrorist attack was stopped and these (possible terrorists) lost lots of money due to these options.

[aiki14]

This may be the staight dope on this, I found it here
http://www.globalresearch.ca/index.p...articleId=6660

It's originally from the street.com


Dispelling the 'Bin Laden' Options Trades
By Steven Smith and Aaron L. Task
Staff Reporters
8/30/2007 3:23 PM EDT
URL: http://www.thestreet.com/newsanalysi.../10377063.html

Updated from 7:07 a.m. 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) 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.

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.To read more of Steve Smith's options ideas take a free trial to TheStreet.com Options Alerts.

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