Lehman option traders bet stock will keep falling
Tuesday August 19, 2:47 pm ET
By Doris Frankel
CHICAGO (Reuters) - Many traders scooped up defensive put options on Lehman Brothers Holdings Inc (NYSE:LEH - News) on Tuesday, betting its stock will suffer more losses.
Shares of the fourth-largest U.S. investment bank fell 13.1 percent, or $1.97, to $13.11 on the New York Stock Exchange in afternoon trade.
In all, roughly 81,000 puts compared to 66,000 calls changed hands, exceeding the recent daily average of 88,000 contracts, according to option analytics firm Trade Alert.
"Bear in mind, there is a lot of pessimism about the financial sector in general. So when there is eyebrow-raising news about Lehman, option traders are extra vigilant on that stock in particular," said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.
JPMorgan Securities on Tuesday forecast Lehman Brothers will take a further $4 billion of write-downs in the third quarter due to losses from mortgage-related investments.
"Investors are worried about more write-downs than originally thought and Lehman might be forced to go back to the capital markets to raise funds," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.
Investors often turn to equity puts, allowing them to sell the company's stock at a given price and time, to speculate on potential stock weakness or to insure their stock positions against further declines in the stock's price. A call conveys the right to buy the stock at a preset price and time.
In one unusual transaction, a trader appeared to be betting that Lehman's stock would drop below $10 by September options expiration.
It looks like the trader sold 1,500 October $5 puts to buy the same amount of September $10 puts, Darst said.
The investor believes the September $10 puts will appreciate in value and ideally become in-the-money.
"That would happen if we saw another increase in implied volatility and a heavier demand for puts," she said.
Implied volatility on all Lehman options, a key driver of an options price, stood at 145.7 percent in afternoon trade, up from 129.3 percent on Monday, suggesting heightened fear of
fluctuation in the stock's price, Darst said.
Lehman's implied volatility topped out at 256.3 percent in mid-July when U.S. stocks fell sharply on credit concerns.
(Reporting by Doris Frankel; Editing by Jan Paschal)
