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There was an interesting Bloomberg article yesterday giving a postmortem on the Bear Stearns (NYSE: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

Source: Bear Stearns: Follow the Puts