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I smell a new conspiracy
Remember when thousands of put options were placed on the stocks of United and American airlines by 'anonymous investors' immediately before 911? Does the recent increase in put options signal investor nervousness about the volitile market or does someone know something that the rest of us don't know? Yet...
More Investors Are Betting on Major Selloff in Stocks
Topics:Economy (U.S.) | Stock Market
By Jim Kingsland | 27 Aug 2007 | 09:13 PM ET
© 2007 CNBC.comNot everyone on Wall Street is convinced that the worst is over.
In fact, some investors are betting tens of millions of dollars that the market is headed for a selloff -- a major selloff.
The reason: worries about a worsening credit crunch, along with speculation that the Federal Reserve may defy expectations and hold off on cutting interest rates at its Sept. 18 meeting.
So far, over $500 million in so-called put options have been purchased betting that the benchmark Standard and Poor's 500 index
To put it in perspective, a 5% drop in the Dow Jones Industrial Average would be the equivalent of 667 points. An 11% decline would equal 1,468 points. And a 52% drop? You don't even want to know.
The upshot is that some major investors are putting up big money that the market is facing a major decline.
"There is still fear and investors are buying crash protection," says Todd Salamone, senior vice president of research at Schaeffer's Investment Research.
Of course, there are always investors betting on big declines -- they're called bears. What's unusual is the amount of money being put up on such a doomsday scenario.
"The activity in those puts has been a lot more aggressive then we have seen in the past," said Bill Lefkowitz, options strategist at brokerage firm Finance Investments. "Part of it is the environment and volatility where the Dow Industrials can easily swing over a hundred points during the day, or session to session."
Salamone of Schaeffer's points out that the index options have been "put dominated over the last several months." And the bets may have as much to do with hedging portfolios -- basically an insurance policy you hope you don't need -- as much as outright speculation.
"We don't know who the end users of these options are and often they are specialists, pros looking at arbitrage plays, so the common man doesn't necessarily need to be concerned," adds Andrew Wilkinson, a senior market analyst at Interactive Brokers. "But it’s a legitimate build of people wanting protection against the next 10% down should it come."
Whatever the reason, Lefkowitz says worries about what the Fed will do about interest rates are spurring big investors to buy protection in case of a major market drop.
"If the Fed doesn't cut Fed funds, the options market is telling you that the overall stock market will come down hard," says Lefkowitz. "We could be quickly under the 1400 level of the S&P 500 if the Fed doesn't act."
Fed-fund futures and a variety of market pundits have been forecasting a 100% likelihood the Fed will lower the benchmark lending rate, now at 5.25%, meaning there's no room in the market from the Fed for a surprise.
Lefkowitz also says the activity isn't strictly driven by money managers looking to protect portfolios. The put options are tempting enough for speculators to jump in. He says even if the market doesn't fall to below S&P 1400, the put options could still easily rise in value by "20, 30, 40 percent if we saw another large down day."
I smell a new conspiracy
Yeah, who would be shorting the market today? Obviously the Bilderbergers and the CIA.
Unfortunately I work for a bank which does not allow it's employees to sell the market short. Otherwise, I would be part of the short-seller crowd.
What exactly is the conspiracy here? What does someone know that cannot be readily gleaned from the WSJ, FT or other financial media outlets, let alone what most ins utional investors and hedge fund managers have access to?
A 52% drop? Be serious...this isn't just a 'correction' people are dumping their money into....
$500 mil? That's a drop in the bucket in the capital markets. Also, how much is invested in those options with strike prices signifying a 52% drop? Probably a mil or so just for the of it. The market would never sell off that bad and if it did because the asteroid the Masons didn't tell us about hit the Earth then we'd have worse things to deal with. My God this forum needs better threads.
...Dubya, and thus Cheney, have about a 5-6 month window left to bomb Iran.......There are wells in Southern Iran that need taking.....you do the math.....
Who is going to "take" the wells? We don't even have enough troops to sustain the surge past next spring. Do that math.
The market wouldn't drop 50% even if that happens. Take off the tin foil and go for a walk.
Isn't there a 150,000 private army just sitting on their hands in Iraq? Hmmm...not that they would do any of the really dangerous initial combat though...
Well, we'll find out soon enough if there is a payoff to the "Grays" and their Mormon friends.
Doesn't take a drop 52% to make money on these put options.....A lot of fundamental information coming out of the US is downright bearish to say the least and it is backed by tangible evidence. Most bullish sentiment are not qualified by evidence...... just 'trust me' type reassurance from the Dave Ramsey types....
Lets look at the Dow Jones weekly chart for the last decade. Hit a top six weeks ago and looks poised on the top of a rollercoaster. If it were to fall in the next week or so by another 15% and break major support at 11000 then the next target would be the support at 8000 and our man with the puts would be well in the money.
The rises in the stockmarkets over the last year or so have been unbelievable for many, the falls may do the same; however in the bigger picture this scenerio is well within the realms of the next month of two.....especially with things heating up in the M.E....as I have posted before in the past, war with Iran would lead to a currency collapse in the U.S.....
Well, if the market doesn't drop 52% by the expiration date then they're worthless. Otherwise, as each day passes by there is a much shorter timeframe for the market to dip by that amount, which all else held constant will lead to a drop in the price of those puts. Go look up the price of an option on any equity right now. The options with an exercise price farther out at the same exercise price are worth more. I wonder why...Doesn't take a drop 52% to make money on these put options
Anyways, these are September puts. We'll find out soon enough if your conspriacy exists or if this is another Nbadan special.
"We don't even have enough troops to sustain the surge past next spring"
dubya and head didn't have enough troops in Mar 04, but that didn't stop them.
I don't have put options, but I'd probably buy in afterwards if the market drops 52%.
Yeah, but they thought it could work and had a general that agreed with them. The numbers simply aren't there for an invasion of Iran.
I thought it was recycling an old one?
I'd say the latter
I didn't get the memo.
The market is crashing?
1929, 1987 and....
Why is the last graph from a completely different stock index?
The S & P 500 is used as a leading market indicator of large-cap stocks....
And you buy into that Dan?
DJIA 1929; 381 to 230. A loss of 39.6%
DJIA 1987; 2722 to 1738. A loss of 36.1%
DJIA today… Using S&P graph? You buy into this propaganda?
Numbers to right, about 1550 to 1380. A loss of 11.0%.
Is that any comparison?
Come on. Get real before quoting someone’s propaganda. The Dow fell 14.3% after 9/11 and we recovered just fine.
Now here is a recent Dow graph:
Notice the close on 7/19/07 is 14,000.41 if you look at historical. The low is 12,845.78 on 8/16/07. This is a drop of 8.2%. No wonder your propaganda artist switches to the S&P graph…
Is there really any comparison?
The fundamental are saying yes, yes, yes....
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