Everybody just lost on BSC, or anybody won extreme amount of money?

Discussion in 'Trading' started by lojze, Mar 17, 2008.

  1. lojze


    What is general outcome?
  2. kongkaka



    Who Traded 55,000 Bear Stearns $30 Puts Tuesday?
    Posted March 14th, 2008 by theStockMasters...

    * Financial News

    Interesting story from theStreet.com today about Bear Stearns, some big money was made this week on Puts. On Tuesday March $30 Puts were trading at 15 cents, today those puts are at $5.50 a contract. Damn.

    Article from theStreet.com:

    This past Tuesday, when Bear Stearns(BSC) was trading around $65 a share, there was huge put volume in the March $30 strike.

    Over 55,000 contracts traded that day at an average price of 15 cents a contract. This is an extremely unusual trade in terms of the number of contracts and how far out-of-the money those options were at the time. This begs the question of why someone would execute such a transaction.

    First, it's important to understand that buying a put gives you the right to sell the stock at the strike price. So to buy a put that requires the stock to decline over 50% is essentially a bet that the company is possibly on the brink of going out of business or about to deliver some terrible news.

    Remember, these options expire on March 20, so that left only 10 days for some event to occur that would cause these puts to go into the money and have some value.

    So it appears that as rumors began swirling early in the week that Bear was having liquidity problems and might possibly be bordering on insolvent, someone took that to heart and bought the puts as disaster insurance. And today came news that several banks, including Goldman Sachs (GS), would no longer act as a counterparty to any transactions with Bear. The inability to execute trades would essentially put Bear Stearns out of business.

    Hence, we have today's selloff in which shares of Bear are down some $25, or 44% to around $30 a share. Those disaster put options are trading around $5.50 a contract.

    This is an extreme situation, but illustrates how put options can be used as insurance and/or to get downside protection from a decline in a stock's price.

    Other banks and brokerage firms are seeing put volume today and several names such as Merrill Lynch (MER) saw above average activity last week. Merrill saw 13,000 and 16,000 of the March $45 puts traded last Thursday and Friday, respectively. That volume was over 13 times the 30-day daily average. At the time the stock was trading around $46 and the puts were valued at about $1.50 a contract. Today Merrill is down to $44 and the puts are worth $2.60 a contract.

    On Tuesday of last week, Citigroup(C) saw 57,000 of its March $20 puts trade. But this volume was only about three times the daily average and represented less than half the open interest in the strike. Still, on that day those puts were changing hands at around 40 cents, and today they are worth about 90 cents a contract.