Speculators Are Profiting from Bear's Demise

According to The Street.com, 55,000 March $30 Bear Stearns (BSC) put contracts traded last Tuesday at C$0.15 when the stock was still trading in the C$60s. The March option chain would normally expire on the third Friday of the month, but as it is Good Friday this year, the expiry date was actually March 20, a day earlier.

One of two types of players would have strapped on that trade: speculators who anticipated the demise of Bear Stearns, and/or existing Bear insitutional shareholders looking to protect their downside in the case of a calamity at their company. Given the short term nature of the “insurance” acquired, one might assume that speculators were buying the puts. Long holders would likely have wanted protection that lasted longer than seven trading days.

With Bear shares trading at $4.50 on Monday, and a takeover price of about $2, those puts will be worth about $25.00. Naturally, Monday’s put option trading volume may well represent many different players, but someone made money if they were able to keep their stomach together and hold their position, even as Bear fell by almost half on Friday. Waiting until Monday meant that the puts, which were trading at $9.40 on Friday, would have soared even further Monday morning on the news of JPMorgan’s (JPM) acquisition (see prior post “JPMorgan inks the deal of the year” March 16, 2008).

Buy 55,000 put contracts at C$0.15 for a cost of $825,000.

Sell 55,000 put contracts at ~C$25.00 Monday for $137,500,000.

Pocket $136,675,000 (ignoring commissions).

At least someone other than JPMorgan shareholders had a chance to make some money from these swift events, painful as they are to watch for our friends at BSC.

Comments

[Egg]

"Speculators"... is the wrong word to describe the people who bought the puts.

It's pretty clear from a common sense point of view that they had inside information that other firms had ceased doing business with Bear Stearns last week. Inside information that the CEO conveniently failed to report during his infamous CNBC interview.