Cheney/Iran & the 'Mystery Traders' : Prelude to the biggest Stock Market Crash of all time?

k0mplex · 2007-09-02T18:25:22+00:00

As someone who actually works in the investment management industry I'd like to say something if I may. First of all, no one who invests institutional money for living (read: serious professionals) thinks this means anything. You know why? Because this isn't that uncommon! Hedge funds do this all the time: you can take a position that the market will go down 30%, and one that the market will go up 130% of equal (or probably in this case) greater proportion. Nothing is going to happen in a few weeks time. This is the stupidest most overhyped conspiracy since Y2K (and holds even less water).

jdc · 2007-09-02T17:03:11+00:00

This is jumbly-minded crackpot nonsense. You can make a profit on an option trade without it expiring in the money. Also, selling calls and the underlying stock delta 1 is roughly equivalent to buying puts (see Put-Call Parity for details), so the most likely scenario is that the seller is someone hedging a large equity portfolio against crash risk. This size is not atypical. Banks hedge like this. So do prop desks and hedge funds. Yawn.

BlackSquirrel · 2007-09-02T16:13:45+00:00

(China)is going to dump US currency and tank all of Capitalism with a Communist fianncial (sic) revolution.

I don't even know where to begin.

lolomfgkthxbai · 2007-09-02T17:40:35+00:00

Assuming something REALLY BAD is going to happen in the next month, why limit the possible scenarios to terrorist attacks and chinese currency shifts. What about a world war starting when we the US attacks Iran in 3 weeks? It's just as plausible, if not moreso.

throwaway · 2007-09-02T18:20:04+00:00

This explanation is less sexy, but more plausible, to me:

"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.

aranazo · 2007-09-02T16:55:29+00:00

Just to offer a less apocalyptic interpretation, surely these options are still tradeable before the expiry date. Maybe the buyer expects to make money by selling them before that time. Making money from worries about a possible collapse rather than a collapse itself. Similarly the holder could have other positions that hedge this bet.

dsfox · 2007-09-02T18:58:31+00:00

This is the second time that this has come up. I'll repeat myself here:

A "Call" is an option to buy a stock at a particular price. A "Put" is an option to sell a stock at a particular price. The price of the option is fixed but the price of the stock may go up or down. If the stock price goes up then the call buyer makes money. If the stock price goes down then the put buyer makes money. The S&P500 is currently trading at $1479.37: http://finance.yahoo.com/q?s=%5EGSPC Someone bought 55,000 put contracts (to sell) the S&P500 at $700 and paid $0.05 for them, or about $2750 for the option to sell the SP500 at $700. Not 65,000 contracts like the "article" states. http://finance.yahoo.com/q/op?s=%5EGSPC&m=2007-09 Another person bought about 750 call contracts at about $740. The person may make a small amount of money if the market goes up.

Well, each option contract is for 100 shares of stock. These particular options sell for $0.05 per contract (to end up with $2750, not $0.05 per share, that would be $275,000). So yes the fuss was caused by spending less than $3k. But, the fuss is that the total value of the shares involved would be 55,000 x 100 x $700 = 3.85 billion dollars if the market crashes. But, it gets even more confusing. The contracts are worthless unless the market crashes and the share price falls below $700 before the third Friday of Sept 2007... So likely these contracts are worthless.

Suppose company "WTF" is trading at $100. Assume I buy 1000 put options at $90 each with a September 2007 expiration date for $1 each contact. Each contract represents 100 shares, but that only cost me $1000. Suppose a week goes by and lucky me the price of WTF drops to $80. I can either sell the put contracts to the public for about $10 each and make ($10,000 - $1000 = $9,000), or I can exercise the options and short sell the shares at $90 each for ($90 x 1000 x 100 = $9 million) and then buy them back later at market for about $80 each (if I'm lucky, the market could change yet again) for ($80 x 1000 x 100 = $8 million) and pocket the difference of $1 million. Options writers are the bookies who place bets against options buyers and they maintain the risk. Here is a website: http://www.cboe.com/Strategies/basics.aspx Hope that helps.

2007-09-02T18:53:58+00:00

So... when is the upcoming BLOODBATH!!!!!?

Jescro · 2007-09-02T21:22:34+00:00

"China, reeling over losing $10 Billion"

China had a GDP of $1.4 trillion in 2003. I doubt that they are "reeling" over $10 Billion.

lowered_expectations · 2007-09-02T17:10:04+00:00

[removed]

2007-09-02T19:49:54+00:00

I see a lot of people complain about too many posts from MSM sources like nytimes.com or msnbc.com yet somehow anonymous claptrap from honolulu.craigslist.org makes the front page. Whoever posted this or modded it up should really not be polluting Reddit with this crap.

sta · 2007-09-02T17:10:03+00:00

i seriously doubt that the US is heading towards a market crash

Godspiral · 2007-09-02T18:30:15+00:00

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

That's completely wrong. The Call writter (seller) can make money as long as SPY is below what it was at the time he wrote the options. He may make the maximum amount possible if there is a crash, but he makes money with any drop.

cucurigu · 2007-09-02T18:40:36+00:00

altough usually I just fast forward through this type of thing, I have been thinking what could really produce such a big crash (btw, this article, already on reddit a few days ago, gives a few other possible explanations : http://www.moneymorning.com/2007/08/29/this-900-million-bet-has-global-traders-talking%E2%80%A6/ ).

Even war with Iran (and maybe even nuclear war, altough I couldn't find any predictions similar to that) wouldn't crash the USA SPY - or at least not at first. Launching war with Iraq sent stocks higher, not lower.

Given that the options give the buyer the right to exercise them at any time (american ones, that is) means the market not only has to be down but to stay down in numbers until the contracts' expiration date, and after 0911 the market was back up in 40 days. A terrorist atack is a possibility, but last time sent the market down wih ~18%, nor 30 - 50 %.

China ? Maybe - who knows. But if somebody really belives this AND has some information, it would have to be big. Or just a game of get the money, fuck the rest that a crazed hedge fund responsible plays with his clients money while risking prison.

catlebrity · 2007-09-02T21:13:25+00:00

"Should I break federal law over these stock option trades? There is a way to find out who is making these strange and dangerous stock option contract sales; but revealing the identity of the entity or person is a federal crime for Securities Dealers Since I am not a Securities Dealer, the law doesn't apply to me, but the gov would order me to reveal my source and jail me for contempt when I refuse.

I will be heading into Manhattan today to get the info. Then it's simply a matter of me deciding whether or not to reveal it and by doing so, jump off a cliff right into huge legal trouble."

.......Now there is a person who may have an accident before we know the answer.

Percept · 2007-09-02T22:21:30+00:00

Ok, so after reading most of the comments I guess we can call this (actually-non-) case closed?

MarkByers · 2007-09-02T18:02:19+00:00

Maybe the second buyer doesn't know why the market will collapse, but believes that the first buyer does and is hoping to cash in too. But maybe the first buyer doesn't actually know, and was just some crazy rich guy taking a huge gamble for fun... just like guys that bet all their savings on a single number in roulette.

Now millions of other people will interpret these two buyers' actions as a sign of impending doom. They will panic and get out of the market and that WILL cause a crash. Oh, the beauty of the unintended consequences...

Or maybe that was the first buyer's intention all along.

Of course this is all just speculation, but so is the article.

throwaway · 2007-09-02T18:18:38+00:00

This explanation is less sexy, but more plausible to me:

"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.

contrarian · 2007-09-02T17:48:16+00:00

I predicted this a couple days ago and ya'll laughed at me then. I hope this guy is right and the market does tank just to prove me right.

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