This from a friend. Obviously I don’t have any inside pipeline – I don’t circulate in the circles that could do such things — but I’m expecting the markets to tank shortly anyway, just from accumulated chickens coming home to roost. My bet would be a simple market crash, worldwide because everything is tied in together, caused strictly by fundamentals.
Could we instead, or also, have a terrorist attack? A false-flag attack? An attack on Iran? Sure. But they’d hardly be necessary.
The thing that sticks out, for me — assuming that the financial facts reported below really are facts and not fiction — is that nobody places that kind of bet unless he knows; and how better to know than to be in the position to make it happen? That’s how the bear pools operated in the 1920s to move the markets up and down like an organ, until Roosevelt used Joe Kennedy (who knew from the inside how the game was played) to re-write the rules as SEC commissioner. Of course, brilliant, honest, far-seeing, compassionate Ronald Reagan led the undoing of those reforms, beginning 25+ years ago.
Stand by, it may be that we are not going to return to our regularly scheduled broadcast.
Behind the scenes
There is a story making the rounds on the internet for over a week now that an entity or entities have been shorting the market to the tune of billions of
dollars, essentially betting that US, European and Japanese markets are going
to drop up to 25% by September 21. The following is an excerpt from an article posted at:
http://www.financialsense.com/fsu/editorials/tetreault/2007/0831.html
(Financialsence.com is an old and well-respected financial website).
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As many of you know I get a lot of information and technical data that crosses my desk, during the day, and I have a program that scans blogs and bulletin-boards for specific information of interest, that I sort-through at the end of the day…and I keep reading references to a mega-trade with a huge bearish-under-tone to it; so I have been doing my own research, and this is what I have discovered….
There is currently several billion dollars in option bets on a global basis with the speculative premise that we will see a major drop of 15-25% or greater in the next 21 days. These are not just your run of the mill speculative option-plays these are very specific bets of a magnitude never seen before (the only comparison is the huge bets taken prior to 911).
And these types of what I call-mega-trades are escalating…for instance, just last week someone sold short “naked” 61,730 SPX 700 calls. Selling calls short and naked has the same result as buying puts but this is a tremendously dangerous play (and unlike buying puts will go basically undetected as this type of play will be often overlooked). Basically they are betting heavily that the market will tank and as such the call’s value will shrink and they can buy them back to cover at a significantly cheaper price.
Now why is this so darn-dangerous, its simple if the SPX increase in value…the calls increase in value and whoever took this trade would be significantly under-water on the play; whoever shorted these 61,730 deep in the money calls is taking a monstrous risk….but in the infamous words of Paul Harvey…now for the rest of the story. These bloody calls were trading at approximately $770 per share, $77,000 per contract; so you can see it’s out of the wheel-house of most hedge-funds and many large-trading-firms as shorting 61,730 contracts naked produced a whopping income of $4.75 billion in premium dollars; yes folks this one trade was almost a 5-billion-dollar single trade; not the type of chump change that I employ and I doubt this was not a very-calculated bet!!
This transaction was coded as a spread trade so I went looking for the offsetting entry to determine what type of thought prompted this position; (Note: I find it extremely doubtful that anyone would want to go that deep in the money for any kind of spread trade.) I eventually did find the offsetting trade as it appeared at the SPX 1700 puts strike where 61,740 contracts were purchased long. If I have done the math right this trader/organization has roughly $3.7 billion in premiums sitting in their account and a massive short position worth a huge amount of money if the market tanks; now just ask your-self how many players are there that can risk and leverage this type of play (GS, BSC, LEH are a couple that come to mind)! I have been analyzing this for the past several days and it has made me nutty thinking about it. Now if this trade was only a blip, it could be easier to ignore or discount….
But now this strategy gets even more complicated, as it is spreading. Another entity bought 245,000 September puts on the 2,800 strike on the DJ Eurostoxx 50 on 8/16; and they did so when the index was at/around 4,100 at the time; and as such this is a huge and large out of the money play and it would take mega negative event to drop that index down that much in the next couple of weeks.
Stranger yet; somebody else bought 10,250 puts on the Nikkei 225 Index at the 11,500 strike; while the Nikkei is currently trading around 16,000. Now those puts were a lot cheaper than the SPX put/call play but still a major bet that disaster will hit the index before their expiration on 9/14.
On Monday CNBC reported that investor or inventors had bought more than $500 million in out of the money put options on the S&P betting for a further decline of 5% to 10% before September expiration.
On Friday another trader sold 10,000 contracts on each of 12 strikes (120,000 contracts) of deep in the money SPY calls with an average price of $6,500 each. That is $780 million in premium received and a huge risk if the market continues higher. The strikes were between $60-$95 when the SPY’s were trading between 146-147; these were very deep in the money calls…according to what I found open interest on the strikes before the trade averaged only 265 contracts each.
This has left me scratching my head as I continue to ask myself why are there so many-mega trades going off so deep in the money unless someone knows something that I do not know, that would precipitate a very large move! Now of course there are multiple scenarios as to why such an investor/trader with such deep pockets would make such a monstrous directional bet. If it is directional and not a cash crunch spread due to margin calls or the need to raise quick cash they only a few scenarios make sense:
* The most likely is that Israel with the assistance of Bush’s war-forces strikes Iran! The next scenario is that we get hit with a significant terror attack!
* Some believe that Al Qaeda will take the seven-year anniversary of 9/11 to hit us again with another monster attack. 9/11 is on Tuesday again this year as it was in 2001; and many rumors have been circulating for months that Al Qaeda was targeting US cities for some sort of nuclear attack…
* The last scenario has a major financial institution falling apart over the next two weeks. Just imagine if a Bear Stearns or Lehman Brothers were forced to file bankruptcy because of the subprime/slime contagion; the markets would react as if a bomb went off, especially in the financial sector; as who would trust any bank or brokerage firm there would be a mass exodus for the door. BSC and LEH both report earnings 9/13, and this could really make this scenario very interesting!
There are other conjectures others but these are the biggies!!! Even the fed-heads announcing no-rate cutes could not impact the markets enough (at least I do not think so to drop them hard enough for this play to be very profitable). Just imagine the clout, and resources needed to execute such a position to be able to margin a $5 billion naked option trade the margin requirements would be extremely huge; I bet the market maker when s/he saw this order shit-themselves, as the leverage to delta-hedge-neutral the trade would be huge as well.