Bear Stearns: Follow the Puts

There was an interesting Bloomberg article yesterday giving a postmortem on the Bear Stearns (BSC) stock decline. In particular, the purchase of deep out-of-the-money puts are investigated. As quoted in the article, "On CSI Wall Street, the options are the DNA."

As it turns out, trade data shows that 5.7 million puts traded on March 11 of this year at the $30 strike price, along with 1,649 that traded at $25, worth in total about $1.7 million. The kicker, and why this is raising eyebrows, is that when purchased these puts were over 50% below the March 11 closing price of $62.97, and also only had about a week and a half until expiration. As far as the investigators are concerned, the traders either were buying a lottery ticket, knew something was going to happen, or were in the process of making something happen. Rumors of insolvency and investor concern filled the airwaves for the rest of the week putting further pressure on the stock until it was trading around $30 by the end of trading on Friday the 14th.

On that same day, with the stock opening around $54.24, the CBOE starting listing eight new put option contracts with strikes going down from $22.50 to $5, each with an expiration of only one week. That same evening Treasury Secretary Paulson called CEO Schwartz stressing the need to find a buyer to avoid the appearance of a Government bailout. And as they say, the rest is history.

Even more suspect is that on Friday March 14, a total of 6,303 of the $5 strike puts traded, above the $2 initial purchase price, but well below the Friday closing price. I am sure those individuals have been receiving some calls, as well as making a few call themselves.

Disclosure: None

Comments

[helplessobs...:]

This will turn out to be a much bigger story and will benefit BSC shareholders when much of the shortsellers and put buyers gains are returned to the shareholders.

2008 Aug 12 10:52 AM

[HT:]

Why does the put option activity directly mean that these traders were rogue speculators who were intent on bankrupting the company--is there no good reason to buy short-dated deeply OTM puts? Such a trade would have been a very useful hedge to protect your downside if you were selling puts at a higher strike price, or if you were long Bear stock and wanted bankruptcy protection in light of the events of that week. So get over it--Bear did not collapse because of evil speculators, but because of the vast deterioration in its credit fundamentals.

2008 Aug 12 12:01 PM

[User 243158:]

so you're saying that I should look for large volume and o.i. in front month, far OTM puts in financials that are not getting the best news (like say LEH, MER, or AIG to name a few) and then follow suit? it would be hard to miss volume THAT conspicuous. I'll keep an eye out.

2008 Aug 14 01:26 AM