Betting on a crash?
It's been whizzing around message boards for days now. But here's the first substantial account I've seen. The article is dated August 16:
An anonymous investor has placed a bet on an index of Europe's top 50 stocks falling by a third by the end of September, as world equity markets plunged for a third day and volatility hit a three-year high.
The mystery investor has bought put option contracts on the DJ Eurostoxx 50 index that will result in a profit if it plunges to 2,800 or below by the end of September. Based on the 2,800 strike price, the position covers a notional €6.9bn, and potentially even more using a market price of about 4,100 when the trades were done on Tuesday and Wednesday.
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.
The investor has bought a total of 245,000 put options on the index.
But wait, there's more! The phenomenon has crossed the pond:
So far, over $500 million in so-called put options have been purchased betting that the benchmark Standard and Poor's 500 index will tumble anywhere from 5% to 11% in September. Some investors are even buying put options calling for 52% decline. A "put" option increases in value as the underlying stock or index falls.
To put it in perspective, a 5% drop in the Dow Jones Industrial Average would be the equivalent of 667 points. An 11% decline would equal 1,468 points. And a 52% drop? You don't even want to know.
The upshot is that some major investors are putting up big money that the market is facing a major decline.
"There is still fear and investors are buying crash protection," says Todd Salamone, senior vice president of research at Schaeffer's Investment Research.
Of course, there are always investors betting on big declines — they're called bears. What's unusual is the amount of money being put up on such a doomsday scenario.
"The activity in those puts has been a lot more aggressive then we have seen in the past," said Bill Lefkowitz, options strategist at brokerage firm Finance Investments. "Part of it is the environment and volatility where the Dow Industrials can easily swing over a hundred points during the day, or session to session."
All this has sparked all manner of conspiracy theories around the 'net, including the possibility of the sort of financial manipulation said to have taken place right before 9/11. We take no positions here, for we're not omniscient. Just consider this a friendly for-what-it's-worth heads-up.