Friday, August 24, 2007

Troofernomics: Part II

From one of the conspiracy idiots on the Loose Change Forum:

Disclaimer: I don't know this site and I can't confirm what they are saying. But the apparently there were some HUGE amounts of money spent on options by a single trader (individual, company?) totaling about $2 billion. The trade doesn't make sense except if the market crashed big time. Options only start making money if the stock market goes down 30%. Timeframe is between now and Sept.

Here's how a guy summarized the situation:

"1) August 22nd, someone wrote almost$2 billion worth of calls that the market will tank in the next 3-4 weeks. Down by at least 30+%

2) The forum members think it's a hugemistake by someone and it won't"stick" over night.

3) Someone calls in some kind of optionshot line and guy confirms that it's legit,not a mistake. Guy sounds really worried.

4) Aug 23 they confirmed that this huge $2 BILLION CALL had indeed "stuck".

5) So, someone put a hell of a lot of moneyon the line that the market will crash inSeptember. They are either incredibly stupid,or know something we don't."

First of all, someone should point out that a call is an option that pays if the price goes UP, not down. A put option pays if the price goes down. Secondly options are not based on percentages, but on an exercise price that the seller sets. Lastly, even if someone buys a "put", it doesn't necessarily mean they think the market is going down, they could just be buying insurance on a long position that they don't want to unwind. I would be surprised if anyone is even selling this many puts that are so far out of the money anyway, unless one of the large brokerage houses just considers it an easy way to pad their profits.