Bear Raid

The source is a blog run by an options expert by the name of John Olagues.

The allegation is that someone bought massive amounts of deep "out of the money" Bear Stearns "Put" stock options in the run up to the collapse.

What this means is that they acquired the right to sell Bear Stearns stock at a price far below the then current price of $70.00 per share.

In this case at $17.50 at $15.00 and even at $10.00.  

If the price remained above this figure by the time the option expired, the buyers of the "Put" would have lost the premiums they paid. But as we know now, it didn't, and actually collapsed to $2.00.

In order to do this, they had to ask the relevant exchange to open new "series" of option "strike prices"  at price levels way below anything in existence, I think.

There is nothing unusual for an option exchange to do that - particularly for dates well into the future - but the thing about this alleged market coup/ trading scam is that the expiry date for the requested series were relatively close by, in April, and evn March - which had only days to run.

As the article explains, this fact means that the "time value" of the options was therefore minimal, and the leverage vastly increased.

Essentially these people were betting on an "outsider" they knew was going to win....

The introduction of those far-out-of-the-money put series in the April and March months immediately before the crash provided a vehicle whereby extreme leverage was available to the insiders.

In other words if an insider had $100,000 and he knew that Morgan would buy Bear Stearns at 2, he could make 5-10 times more on the $100,000 by buying the newly introduced March puts. This is so because the soon to
expire far out-of-the-money puts were far cheaper than the July or October out-of-the-money puts.

And that is why the illegal inside traders requested the exchanges to introduce the far out-of-the-moneys just days before the crash.

As a former regulator myself, I would be crawling all over these trades.

The sheer greed and blatancy of this - if it is what happened - is absolutely staggering.

One question that occurs to me is who actually sold these Put Options? And why aren't they creating merry hell about the losses?

Where is Spitzer when we need him?