Thursday, March 20, 2008

SEC's Bear Stearns Probe Zeroes In on 'Put' Trades -

SEC's Bear Stearns Probe Zeroes In on 'Put' Trades -
"The Securities and Exchange Commission is investigating the events leading up to the collapse of Bear Stearns Cos., specifically a surge in options contracts betting that the investment bank's share price would drop precipitously, according to people familiar with the matter....

The unusual trading in Bear's options began as early as March 7 and escalated through the following week....
Last week, the number of open put options leaped from 167,439 at the open of trading on Monday to 465,820 by the following Monday. That compares with open put contracts on Bear Stearns hovering around 155,000 the previous week, according to data from Schaeffer's Investment Research Inc., an options-research firm in Cincinnati.

"Betting on a 57% decrease in Bear Stearns stock in nine days is very unusual," said Todd Salamone, senior vice president of research at Schaeffer's Investment Research."

This is really not much to go on as many believed there could be trouble, but still I guess few (if anyone) expected this large of drop.

BTW there is also an investigation into the words of Bear executives prior to the collapse. From the NY Times:

"According to the Associated Press, the S.E.C.’s enforcement arm has sent a letter to JPMorgan Chase, which has offered to buy Bear Stearns, discussing “investigations and potential future inquiries into conduct and statements by Bear Stearns” before the takeover was announced."

1 comment:

Anonymous said...

In hindsighted opinion, interesting plan if indeed it was...

End result: a simple $1,000 put option investment made by an employee to hedge their personal holdings after and as a result of their Chairman’s concerning public illiquidity rebuttal comments ( )would have yielded approximately => $60,000 in liquid assets one week later after the $2 offer was made. Even better, since most were left scratching their heads upon the simple realization that the offer was well below the $10/share general opinion, and since it’s what they wouldn’t be too prudent to reinvest the $60,000 put option windfall into say a $.25/share $10 call option and make a whopping 4,000% return in transaction #2.

Net result $1,000=>$60,000=>$2,400,000 in two weeks! Not a bad plan If indeed it was one!

…Even better, they never would have had to sell their original shares AND the initial put option purchase since made after Greenberg’s public liquidity rebuttal would be justifiable to the SEC as a simple insurance/hedge against their personal holdings. The call option reinvestment would be justifiable in that everyone knew that the $2 offer was significantly undervalued!