Options Trades Explained

To follow up on this story, this is what happens when you let conspiracy theorists practise finance without a license. From thestreet.com:

As if the mortgage-market meltdown wasn't enough to spook investors, some market players expressed concerns about unusual options bets that some observers
have dubbed "Bin Laden Trades."

The blogosphere and options trading desks have been rife with speculation about these trades, which are unusually large bets that the market will make a huge move in the next month. Some entity, or entities, has taken a large position on extremely deep in the money S&P 500 options, both puts and calls, that won't pay off unless the market undergoes an extremely large price move between now and the options' expiration on Sept. 21.

However, Dan Perper, a Partner at Peak 6, one of the largest option market makers and proprietary trading firms, has confirmed that the trades are part of a "box-spread trade."

"This was done as a package in which the box spread was used [as a] means of alternative financing at more attractive interest rates" explained Perper.

A Collision of Ironies

I am have been listening to all the chicken-little-sky-is-falling types predicting the imminent collapse of the dollar, while simultaneously praising the progressive socialist politics of Venezuelan dictator Hugo Chavez, so I chuckled while reading this article in the Wall Street Journal describing how his countrymen are buying up dollars like crazy due to the rapid inflation that Hugo has caused:

CARACAS, Venezuela—Like many people they know in Caracas these days, Alfred and Norma Muñoz are bracing for what they believe is inevitable: a currency crash brought about by President Hugo Chávez's policies.

The middle-class couple plan to borrow as much as they can from a local bank and buy an apartment outside the country. If Venezuela's bolívar plunges against the dollar, they figure, the loan will be cheap to pay off in dollar terms, and the overseas apartment will hold its dollar value. "Plus, it gives you somewhere to flee if things really get bad," says Mr. Muñoz, who runs a small business.

And I must say, this is one of the more creative arbitrage schemes I have heard. They didn't teach this in B-school.

Wealthier Venezuelans have discovered they can use credit cards to exploit the difference between official and black-market currency rates. Some have flown to the nearby island of Aruba and bought $5,000 worth of gambling chips, the maximum overseas credit purchase allowed by the Venezuelan government, according to a person who arranges the trips. They cash in the chips for dollars, then, back at home, buy enough bolívars on the black market to pay off the credit-card debt, this person says. They pocket the rest -- around $2,300 at current rates, more than enough to pay for the trip.

End of the World Imminent: Details at Five

The conspiracy theorists continue their panic over derivatives trading. Alex Jones' Prisonplanet.com has another article on the subject:

A mystery trader risks losing around $1 billion dollars after placing 245,000 put options on the Dow Jones Eurostoxx 50 index, leading many analysts to speculate that a stock market crash preceded by a new 9/11 style catastrophe could take place within the next month.

These people are so economically illiterate that he then quotes a blogger citing an entirely different alledged series of trades:

"The sales are being referred to by market traders as "bin Laden trades" because only an event on the scale of 9-11 could make these short-sell options valuable," reports financial blogger Marc Parent. Dow Jones Financial News first reported on the story.

Of course if you read the Dow Jones story, which actually does reference the right trades, you will find the explanation has nothing to do with conspiracy theories:

The identity of the investor is unknown but market sources speculated it was either a large hedge fund hedging itself against deepening losses, or a long-only fund manager pressing the panic button to protect its gains.

I cannot find it in any financial source, so I am not sure how these conspiracy theorists come up with "risks losing around $1 billion dollars". That would mean each option, cost over $4000. That is a lot of money for an option that is way out of the money. Any first year finance student will learn about Black-Scholes, which states that the value of an option decreases the farther away from the strike price you are. Nobody is going to risk $1 billion for a remote chance at making a maximum of EUR 6.9 billion, especially when even that is based on the unlikely event that all stocks will go to zero.

Incidently, this idea that they repeat that speculators made a killing off of puts on airline stocks before 9/11 is mostly urban legend. The amounts were actually quite modest, and the trades, although above average were nowhere near unprecendented. Alan Poteshman, from the University of Chicago has an interesting paper on the subject, although I don't agree completely with his methodology or conclusions.

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.

http://www.tickerforum.org/cgi-ticker/akcs-www?post=4669

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.

Troofernomics

I follow the paranoid conspiracy theorists a lot, and it always amuses me when they branch into economics. In this case Alex Jones' Prisonplanet website interviews Jerome Corsi, the paranoid right-winger who is spreading all of the North American Union hype. While I certainly agree that the sub-prime mortgage fallout is serious, and there is even a possibility of a recession, his predictions of collapse are bizarre. One thing to keep in mind is that in the post-WWII era, recessions happen on average once every 6 years. The last recession was in 2001, it is now 2007, do the math. Recessions are not the sign of the collapse of western society, they are part of the business cycle unfortunately, until we can figure out how to avoid them entirely, the objective is simply to make them as minor as possible, which basically happened in 2001.



In any case, some of their absurdities:

Corsi urged anyone in the position to do so to quickly pay off any mortgages and get out of debt. Secondly he suggests investment in gold, rather than stocks and bonds which are based on fiat money and are going to decline tremendously in value:

Uhh genius, if you believe hyperinflation is coming, then why would you pay of your debt? Borrow more money, use it to buy assets (like gold), and then repay your debt with worthless dollars.

Corsi, who has a degree in political science, not economics, goes on to claim that this recession will last long because of our lack of exports.

"It's going to last several years, it's largely because we've lost so much of the manufacturing to China, even when our currency tanks, there are no exports we are producing anymore that will gain. The currency is gone, it is being sold off very quietly, worldwide, by the oil producing states, by China, the Euro is increasingly becoming our foreign exchange reserve currency.

This is an often repeated myth. We do not have a trade deficit however, because of a lack of exports, but because of an abundance of imports, as data readily available from the Bureau of Economic Analysis indicates:

History Repeats

I concentrated on finance during my recent MBA studies, and a case which was often repeated was that of Long-Term Capital Management, or LTCM. LTCM, despite being run by some of the brightest minds on Wall Street including a score of PhDs and even a couple of Nobel Prize winners, went bankrupt in 1998 during the Asian and Russian financial crises, and had to be bailed out by a group of banks organized by the New York Fed. The moral of the story is, no matter how smart you think you are, you cannot beat the market, any bet you take is still a risk. Markets are not entirely rational, and when there is a panic the computer models don't hold up, and you have to be prepared to weather the storm until it passes.

Thus it is quite ironic, that we are now witnessing much of the same thing going on:

Aug. 15 (Bloomberg) -- Goldman Sachs Group Inc. waived fees to draw investors to its Global Equity Opportunities hedge fund after stock-market losses wiped out $1.4 billion of assets this month, according to a person with direct knowledge of the terms.

New participants won't pay the 2 percent management charge and Goldman will cut its performance fee in half, said the person, who declined to be named because the information is private. The New York-based firm and investors including billionaire Maurice ``Hank'' Greenberg agreed to put $3 billion in the fund earlier this week. Goldman spokesman Lucas van Praag confirmed the terms and declined to comment further.

Goldman, the world's most profitable securities firm and second-largest hedge fund manager, needed capital after stock declines worldwide confounded Global Equity's computer-driven bets and threatened to spur withdrawals. The so-called quantitative fund lost 28 percent of its value this month. Other quant funds, including AQR Capital Management LLC and Highbridge Capital Management LLC, also suffered declines.

Presumably Goldman is full of bright young MBAs who know this even better than I do, but people think it can never happen to them, that they are the exception. Incidently, for a great insight into LTCM I suggest When Genius Failed by Roger Lowenstein.

The Chief in the Paper

Except for the occassional Wanta nuttiness update I haven't been blogging here much, mostly because of the time I spend on Screw Loose Change. We have been getting much more attention over there, with the latest being a cover article in the weekly arts and entertainment newspaper the Phoenix New Times on my co-blogger and I.

Along with co-blogger James Bennett of Seattle and SLC allies such as New York City's Mark "Gravy" Roberts, author of the painstakingly detailed Loose Change Second Edition Viewer Guide, Curley patrols a veritable Mos Eisley cantina of conspiracy mavens, kooky celebs, Holocaust deniers, nutty academics, anti-Semites, aged hippies, delusional twentysomethings, and cynical, Elmer Gantry-like opportunists, all of whom are united in their opposition to the official version of what transpired on September 11, 2001: that 19 al-Qaeda members armed with box-cutters and knives pulled off the most daring and destructive surprise attack on American soil in history.

Initially conceived as a rebuttal to the popular Internet documentary Loose Change, which, after its release in April 2005, helped disseminate these paranoid conspiracy fantasies to their largest audience yet, Screw Loose Change has since become the way station for everyone who is seeking sanity when faced with the wild distortions, half-truths, and outright lies of the 9/11 truth movement.

More Wanta Nuttiness

Christopher Story continues his story telling. Bizarrely he has individual members of the Supreme Court involved:

Bear in mind also that the two International Court of Justice Judges who are supervising this clean-up are joined by Associate Justice of the Supreme Court Sandra Day O’Connor (for the Republican Party) and Associate Justice Ruth Bader Ginsburg (for the Democratic Party). Contrary, therefore, to assertions from British MI5 sources retailed to us last year that ICJ-related arrests could not take place in the United States, the participation of the two US Associate Justices validates relevant ICJ arrest warrants’ application in the United States: hence Dr Alan Greenspan’s incarceration, which immediately followed allegations that Dr Greenspan and others may have inserted a glitch into the codes in mid-June, preventing ‘payment’. It is understood that Dr Greenspan may nevertheless still have a ‘hold harmless’ agreement containing a clause guaranteeing him a Presidential Pardon in the event of his being exposed as implicated in Wantagate (which he has been).

Supreme Court justices of course do not have political affiliations, nor do they supervise such activities. The International Court of Justice, as I have pointed out previously does not handle criminal cases, and thus has no authority to arrest anyone.

Incidently, Alan Greenspan who Story claims was arrested, despite nobody noticing, continues to appear in public:

July 23 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said financial markets are benefiting from a ``one shot'' flow of savings from the developing world that is about half-way over.

Foreign savings have ``created this liquidity we are seeing,'' Greenspan, 81, told the Building Owners and Managers Association's international conference in New York. ``It is not permanent. It is reflective of a one shot thing. I'd say we're about half-way through.''

But other than his story being preposterous, counter to every observable fact, and completely illogical, there is nothing wrong with it...

Greenspan Still on the Run

Incidently, since I keep on getting comments from people claiming I am a lying shill with no evidence, Alan Greenspan, despite being held without bail continues to appear in public, this time at the 2007 Aspen Festival of Ideas, which was held between July 2-8th. Odd, none of the Wanta nutters have noticed this.

It's the End of the World as We Know it...

And I feel fine. Christopher Story lists all of the things that will happen if the fake Wanta money does not come through. Of course he has been saying this for a year, and no ill effects have been felt. Not to mention that he has also not come up with a shred of evidence:

FUTURE OF THE WORLD WITHOUT THE WANTA SETTLEMENT

Such sources of unnecessary delay are being overcome, but there is no time left and the tinkering has to stop. Everything is taking longer than anticipated, and time has run out. Quite simply, either the Wanta Settlement is completed (nearly 14 months late), or:

• The Euro System will disintegrate as:

• The US dollar continues its collapse and the Euro goes through the roof;

• The United States’ de facto world empire will collapse;

• The United States, reliant on ‘just-in-time’ delivery having allowed its industrial sector to be hollowed out, will be unable to manufacture anything much, since it will remain dependent on imported components which, given the collapse of the US dollar, and the refusal of foreigners to continue buying US Treasury securities, it will be unable to afford;

• Foreign predators will buy up remaining US assets at fire-sale prices;

• Foreign predators will buy up remaining UK assets at fire-sale prices;

• The United Kingdom – the underlying macroeconomic numbers of which are worse proportionately in many respects than those of the United States, following the gross mismanagement of Britain’s finances by Gordon Brown – will be reduced to penury: it has virtually no international reserves, a small productive economy, a colossal services economy, a huge parasitical public sector, and depends for its solvency on the City of London, which will be decimated in the crash;

• The British economy will be flattened anyway, as sterling paradoxically goes through the roof, as it is now doing in parallel with the US dollar’s decline, and because Britain’s macroeconomic data have never been worse;

• Householders with excessive debt will suffer excruciating consequences;

• Equity prices will implode worldwide;

• Derivatives values will go to zero (literally);

• The prices of all exotic financial products will follow;

• Financial institutions will disintegrate overnight;

• Central banks will be unable to handle the situation, yet will panic, printing money on a scale with no precedent (if they have time, which is unlikely);

• Unemployment will soar around the world;

• The Chinese economy will collapse, with 40% of its state-owned enterprises currently continuing to make losses and its foreign markets disintegrating;

• The East Asian economies will experience conditions that will be liable to throw some of them back to pre-industrial living standards;

• Germany, with its huge derivatives exposure, will be severely impacted, and has no defence against predatory hedge funds seizing control of vast swathes of the German economy – just as predatory German organisations have acquired strategic holdings amounting almost to a political stranglehold of the British economy in recent years;

• Germany’s secret DVD-driven long-range hegemony strategy will crumble;

• The southern European EU ‘Member States’, decimated by the artificially high Euro, will exit the socialist European Union Collective one after the other;• Africa will be abandoned and will become a continental Zimbabwe;

• Latin America will be able to export more given the linkages of its currencies to the collapsing US dollar, but in the context of global conditions life will not be easy. Very severe financial problems will inevitably overwhelm the entire region;

• Rates of inflation will soar into the 20s, and will rapidly reach hyperinflationary
levels in some countries, with escalating inflation trends liable to be curbed only by declines in Gross Domestic Product, as in Argentina some years ago;

• There will be no bolt-holes for ‘funny money’;

• Holders of stolen gold will probably be 'liquidated’.

• Soup kitchens will sprout everywhere (as we warned on 2nd September last year [see Archive]: no-one was listening).

And on that note, I am going on vacation. Later.

Alan Greenspan on the Run

Christopher Story continues his Wanta nuttiness, claiming the imminent arrest of even more personalities. Meanwhile, Alan Greenspan, who supposedly is being held without bail still manages to make appearances at posh restaurants with his wife, NBC reporter Andrea Mitchell. And yet I still get idiots posting on here that the story could be true...

Wanta Nuttiness Reaches Fever Pitch

It is rather amusing how Christopher Story writes these dramatic articles regarding how the Wanta saga has the world economic interests on the edge of their seat, but then the story gets absolutely no interest outside of the shadowy regions of the Internet, and people like me who just like laughing at them. In fact Story even claims that the "Greenspan arrest" was intended as a distraction:

We stand by what we have posted on the jailing of Dr Alan Greenspan, but we are not yet further informed as to what has happened to him since that event. What we have now been told is that the jailing of Dr Greenspan has been exploited by Cheney-controlled MK-ULTRA-style disinformation specialists as a diversionary ploy to get people running around crazily looking for the wrong fox.

Uhh, but just who is paying attention? Look at a google search for "Alan Greenspan Arrested". Story is getting so few people interested in his article that his World Reports website isn't even on the first page. And in fact the number one hit is... me. No wonder he wanted to sue me.

Greenspan Escapes

When last we reported, Christopher Story had been discussing the arrest "without bail" of former Fed chief (no relation to yours truly) Alan Greenspan as part of the affair de Wanta. Now Story continues to update this inanity.

UPDATE: 27 June 2007: The Editor has now received written confirmation that TWO Group of Eight intelligence sources have CONFIRMED the previously reported incarceration of Dr Greenspan. The original sources of this information were Gold Badges who are in contact with the Ambassador and Michael C. Cottrell, M.S. By definition, Gold Badge information cannot be elaborated upon. Be it known, therefore, that the Editor holds TWO written statements concerning the accuracy of our report on the jailing of Dr Greenspan being confirmed by these TWO SEPARATE G-8 intelligence agencies. The second intelligence source confirmation was received by the Editor this morning. We cannot elaborate any further BECAUSE WE HAVE REPORTED ALL THAT WE KNOW.

Well of course, everyone knows Gold Badge information cannot be elaborated upon. How could you even suggest something so silly? Of course the source of this information was Sir Leo Wanta and Michael Cottrell M.S. (as an aside, I now insist that everyone must refer to me in print as James Bennett M.B.A).

One thing I missed before though. Story insists that Greenspan was arrested the week of June 15th "without bail", but before posting that he failed to notice that he made a public speech the following week. He must be using Paris Hilton's lawyer...

Alan Greenspan Arrested

It wasn't enough to just have Hank Paulson arrested (odd he keeps showing up in public) now Christopher Story is claiming that Alan Greenspan was arrested because of his involvement in the Sir Leo Wanta affair.

FORMER FED CHAIRMAN GREENSPAN IN JAIL WITHOUT BAIL

During the week ending 15th June 2007, ‘unspecified very senior officials’ in the United States were arrested and jailed without bail, in connection with corrupt financial operations exploiting the financial assets belonging to Ambassador Sir Leo Emil Wanta (1) as sole Principal.

The former Chairman of the Federal Reserve Board, Dr Alan Greenspan, who was in office when these illegal and corrupt financial scandals to the severe detriment of the American people, the US Treasury and the Ambassador were embarked upon, is among those in jail, and has likewise been refused bail. This is only the beginning of the belated sensational consequences of Wantagate.

Odd, anytime Greenspan sneezes the Dow drops 50 points, but somehow the Wall Street Journal and Reuters have missed this.

Whatever you Do, Don't Hire American

Now anyone who has read this blog will know I am as free trade as they come. I spent last quarter working on a major white paper on the practise of offshoring, but this is downright offensive. It is one thing to use globalization to gain access to cheap talented labor, it is another thing to lie and manipulate in order to get there. These people seriously need to take a business ethics class.

H/T Hot Air

One Poor Trillionaire

I mentioned earlier how trillionaire spook Leo Wanta owed $110 in fees and penalties to the Commonwealth of Virginia for his AmeriTrust Groupe corporation. Well, it is even worse than that. I searched the Virginia State Corporation Commission, which allows you to easily search corporate records, and it appears that his corporate reinstatement paperwork was rejected because, get this, his check was returned.

Maybe he needs a better accountant than Michael C. Cottrell, M.S. ?

Wanta Wackiness Update

After becoming the go-to source on the Internet for all things Wanta, I haven't posted much on him lately, mostly because nothing has been happening (surprise, he still hasn't received his $4.7 trillion) but also because I have just become bored of the story.

You have to give Chris Story credit for being persistant though, he keeps trying to come up with creative new ways of running this story, despite no possibility of success. Now he is listing just about every banking executive in the world in connection with this "scandal":

The following is a list of Directors of financial institutions, elected and appointed US and UK officials, Commissioners and others, who may have variously allowed, condoned, accommodated, or whose institutions may have actively participated in, and may continue to participate in, criminal and illegal fiat money financial transactions exploiting the $4.5 trillion compromise financial Settlement agreed for Ambassador Wanta in May and June 2006 and/or circumstances arising therefrom. Typically, this Settlement was negotiated by the duplicitous US intelligence crooks concerned, in bad faith; but the agreement is binding on all parties and has to be implemented. At the very least, each individual listed here may be an Accessory to the Fact of some or all of the felonies under US law listed in Part 3 of this presentation. Many may have been or may be co-conspirators.

I am still waiting for him to serve me with that libel suit he threatened me with. Not like I have ever backed off of my assertion that he is a nutjob.

A Brief History of Economic Time

I am a few days behind on this, but this excellent editorial in the WSJ by Steven Landsburg deserves to be pointed out. Landsburg, who wrote my college micro textbook, is one of the best popular economists out there, although Levitt gets more press. A choice excerpt:

Modern humans first emerged about 100,000 years ago. For the next 99,800 years or so, nothing happened. Well, not quite nothing. There were wars, political intrigue, the invention of agriculture -- but none of that stuff had much effect on the quality of people's lives. Almost everyone lived on the modern equivalent of $400 to $600 a year, just above the subsistence level. True, there were always tiny aristocracies who lived far better, but numerically they were quite insignificant.

Then -- just a couple of hundred years ago, maybe 10 generations -- people started getting richer. And richer and richer still. Per capita income, at least in the West, began to grow at the unprecedented rate of about three quarters of a percent per year. A couple of decades later, the same thing was happening around the world.

Then it got even better. By the 20th century, per capita real incomes, that is, incomes adjusted for inflation, were growing at 1.5% per year, on average, and for the past half century they've been growing at about 2.3%. If you're earning a modest middle-class income of $50,000 a year, and if you expect your children, 25 years from now, to occupy that same modest rung on the economic ladder, then with a 2.3% growth rate, they'll be earning the inflation-adjusted equivalent of $89,000 a year. Their children, another 25 years down the line, will earn $158,000 a year.

Jesse Convicted

It couldn't have happened to a nicer fraud.

Jesse MacBeth stoked opposition to the Iraq war in 2006 when he spoke out about atrocities he committed as a U.S. Army Ranger serving as part of Operation Iraqi Freedom.

MacBeth, 23, of Tacoma, claimed to have killed more than 200 people, many at close range, some as they prayed in a mosque. He spoke at an anti-war rally in Tacoma and appeared in a 20-minute anti-war video that circulated widely on the Internet.

Trouble is, none of MacBeth's claims was true. He made it through only six weeks of Army basic training, was never a Ranger and never set foot in Iraq.

Conservative bloggers exposed MacBeth's lies in May 2006, destroying his credibility and embarrassing the Seattle company that produced the video about his exploits.

Dealey Plaza

I made a recent trip to Dallas as part of a school project. The host company took us on a short tour of the city, which included a stop at the 6th Floor Museum and Dealey Plaza. I wasn't too excited about going, but it is actually quite interesting to see it in person.

The Texas Schoolbook Depository

The "Grassy Knoll"

And yes, Lee Harvey Oswald shot JFK.