SEC Looking into Strange Options Trading


New York – It didn’t take long for the SEC to launch an investigation into potential improper trading (market manipulation) surrounding the collapse of Bear Stearns.  The investigation is centered on unusually high put options volume leading up to the collapse.  

An article in the Wall Street Journal cites data provided by Schaeffer’s Investment Research on the unusual options data. Put options volume increased from 167,439 contracts to 465,820 in a week. As well, there were a substantial number of contracts making extreme long-shot bets.

The surge in put options is a reasonable indicator of either insider information or market manipulation, but this is dwarfed by the type aggressiveness of the options trades. Over 25,000 contracts had a strike of $20, when the stock was trading over $50, and they had expiration dates of March 20, 2008, or 9 days until expiration.  The price drop required was 57% for the options to come into the money. The position is clearly a precise bet on the very near term collapse of Bear Stearn’s share price.

We happen to think that this action is unlikely to be an insider, since the trade screams for an investigation.  However, it also seems strange that any investor would make this bet–a bet that takes a position when the time value of the option is in free-fall and with an intrinsic value of minus $30–without insider information or malicious intent. On the other hand options that far out of the money are pretty cheap, so there is a very slim chance that this event was a stink bid.  However, this is doubtful.

Schaeffer’s Investment Research is a Cincinnati based research provider and was started by Bernie Schaeffer.  The service leverages technical, fundamental and sentiment data to make stock recommendations, but it is known for its analysis of options data.  Bernie Schaeffer has written extensively on the use of options (sentiment) data to reveal trends in the markets.


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