Bloomberg on BSC Collapse - New

[WaveStrider]

Sure companies buy puts to hedge.

But deep out of the money? And right at expiration?

That implies they know it's going out of business. And immediately.

Or it was a really lucky guess on price. And timing.

 

[number22]

Quote from wilburbear:

This is all sour grapes.

My prediction is we will never even know who bought the puts, never mind why they bought them. It's nobody's business.

I agree; but I would like to know who sold these puts.

 

[nkhoi]

Quote from taodr:

This fraud was pointed out months ago in following link. Paulson is not worth hundreds of millions by being honest.

http://www.optionsforemployees.com/articles/article.php?id=130

wow! don't mess with the Fed, eh!

 

[athlonmank8]

Quote from number22:

I agree; but I would like to know who sold these puts.

lol and who bought them

 

[Cutten]

Quote from Landis82:

This article makes some rather naive assumptions, and doesn't even mention the possibility of large institutions buying PUTS to protect their long stock positions.

Everyone on the Street was well aware that Bear was the biggest firm on the Street that cleared the hedge-fund community.

With a few mortgage related funds like Carlyle going under to the tune of $17 BILLION, it wasn't too far fetched to see how this would effect the likes of Bear.

And to assume that people don't make speculative "bets" via options in large size is highly naive.

Bear was swirling the toilet and the RUN on the BANK was in full tilt once Carlyle went under.

Feel free to check the timing of these two events and I think you'll see some decent correlation.

Exactly. This is a moronic article and most of the people quoted have no clue about how people speculate with options.

If a financial stock has gone down 50% in a few days and is rumoured to be going insolvent, buying deep OTM puts with the shortest expiry is well worth a punt. Remember what happened to Refco? If you have done a bit of analysis and concluded the company is in serious danger, it's fair bet because the payoff is so huge and a bk is definitely on the cards. If you are long stock, it's a good hedge.

$2 million is chump change to any decent-sized hedge fund. Many traders have wagered 0.1-0.5% of capital on a 'lottery ticket' like this.

As a comparable, why not look at options trading in LEH, which *didn't* go bust. What about FNM/FRE/WM etc? The "lottery tickets", which were traded on decent size last month, all expired totally worthless. Will we hear Bloomberg or any conspiracy theorists talking about how the hedge funds got it totally wrong on that one? No, because they are biased, don't do their research, and have no real clue about trading.

 

[Cutten]

Quote from flytiger:

I think the author found credible sources who make the case that no one in their right mind would do such a thing without knowing.

I've often bought deep OTM puts on stocks with a few days to expiry, in cases less panic-driven than BSC in March. I've had no inside edge, just a view that the puts are underpricing the risk of a collapse. The idea that no one does this is just retarded.

The people in the article obviously can't think in probabilistic terms. They think the puts are only a buy if you *know* BSC is going bust. That's complete garbage and ever since Taleb published "The Black Swan" no one has an excuse for such idiotic thinking. The puts could have been a buy even if BSC only had a 10% chance of being bust. And IMO it required zero inside information to think BSC had a >10% chance of going broke.

 

[Cutten]

Quote from WaveStrider:

Sure companies buy puts to hedge.

But deep out of the money? And right at expiration?

That implies they know it's going out of business. And immediately.

No it doesn't. It implies only that they thought the *chance* of bankruptcy was higher than the chance implied by the puts. So if the put price would allow a 20:1 payoff in the event of bankruptcy, then it makes sense to buy even if you only think there is a 5.1% chance of BSC going bust by expiration. Thinking BSC had a >5% chance of going broke that week was not exactly an irrational bet, given the liquidity rumours and the panic in the market. Similar trading patterns were observed in LEH at the same time (which didn't go broke); same thing happened with financials in mid July.

Then there's the other possibility, that the puts were bought as a hedge against a long BSC position.

 

[flytiger]

Quote from Cutten:

No it doesn't. It implies only that they thought the *chance* of bankruptcy was higher than the chance implied by the puts. So if the put price would allow a 20:1 payoff in the event of bankruptcy, then it makes sense to buy even if you only think there is a 5.1% chance of BSC going bust by expiration. Thinking BSC had a >5% chance of going broke that week was not exactly an irrational bet, given the liquidity rumours and the panic in the market. Similar trading patterns were observed in LEH at the same time (which didn't go broke); same thing happened with financials in mid July.

Then there's the other possibility, that the puts were bought as a hedge against a long BSC position.

Good. Now, explain all the FTD's.

 

[nutmeg]

What were the conclusions re unusual options activity on airlines prior to 911? Unusual option activity sells papers. Option traders trade options. BSC was the super bowl. Dozens of high open interest equities result in nothing.

 

[Hydroblunt]

Quote from ByLoSellHi:

What, do you have inside information, HydroponicBlunt?

Or are you just gambling?

Inside information is not hard to get, especially for those of us who have brains & are very resourceful. However, the SEC will come after you as the Big Boys Club wants that edge for themselves.

I don't touch US equity markets anymore, but if I chose to play them again, I would have no illussion about how the game is. While people like you want to play yet refuse to accept the reality, continue deluding themselves and get frustrated at the unfairness. It was never meant to be fair. If you can't stand the heat, get out of the kitchen. It is as simple as that.

Stop trying to change the character & mentality on which Wall Street was founded. If you don't like it, don't participate.

Really, what makes you believe that Wall Street owes you a leveled playing field? What makes you think this is possible considering the history of Wall Street and most stock exchanges? Wall Street, in general, rewards those who are ruthless and win at any costs, while penalizing those who try to be nice & fair and play by all the rules.