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2006-10-03 Home Front Economy

Huge number of PUT options for October 6

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Posted by Anonymoose 2006-10-03 00:00|| || Front Page|| [11136 views since 2007-05-07] Top

#1 Historically, I thought having one party in the White House and the other in charge of the House was supposed to be good for the market. Something about gridlock in D.C. being good.

I never thought I would have thought the Democrats could win, but this Foley thing could be the proverbial straw if Hastert get tainted.

Snatching defeat from the jaws of victory.

Posted by Penguin 2006-10-03 01:07|| 2006-10-03 01:07|| Front Page Top

#2 I thought Put/Call options were contrary indicators.

Posted by phil_b 2006-10-03 01:21|| 2006-10-03 01:21|| Front Page Top

#3 I echo the "Uh-Oh" - this definitely has my attention. Let's hope a Muslim-manufactured catastrophe does not descend upon the US.

If it does, may restraint go out the window, and may the payback be biblical in response.

Posted by Lone Ranger 2006-10-03 01:24|| 2006-10-03 01:24|| Front Page Top

#4 Check out the concentrated puts on the Diamonds DOW Trust (DIA):

Aren't "puts" were something you do when you expect the price to fall. I'm not good at looking at this stuff - but the article seems to imply that the massive concentration of put options are on diamonds. Diamonds and Gold and Silver go UP when people think the economy or stock market is going south.

When people are nervous they buy gold and silver and diamonds. It goes back down again when they begin to feel more secure. So it wouldn't surprise me that now that the economy is strong, the DOW raging and things are looking good that those who speculated on gold silver and diamonds set their benchmarks to sell diamonds and gold when the DOW reached a new high.

Seems like a good thing, not bad.

Posted by anon 2006-10-03 01:32|| 2006-10-03 01:32|| Front Page Top

#5 anon,

Diamonds is Wall Street speak for Dow Industrial Average (DIA), SPY (spyders) for S&P 500. Puts on these would imply a negative outlook. While puts on gold would be positive, as you say.

So, if true, these indicators are quite contradictory unless they are implying the end of Western civilization.

Posted by Bernie 2006-10-03 02:37|| 2006-10-03 02:37|| Front Page Top

#6 October has never seen a lot of up side in the past.

Posted by Clinerong Phinesh7921 2006-10-03 04:41|| 2006-10-03 04:41|| Front Page Top

#7 Well, I don't have an online account with Fidelity so I can't see the actual articles from here.

A put option gives the buyer the right, but not the obligation, to sell a stock or other asset at a given price by a given date. The buyer is betting that prices will fall lower than the strike price, by that date. The seller of the put option is betting they will not.

Therefore .... if a lot of people are buying put options, it means a bunch of others are selling them, i.e. betting that those asset prices will NOT fall lower. Why would anyone sell a Put??? Because they get a sale fee for the option and they believe this fee outweighs the risk involved.

Most options are NEVER exercised ... they are a form of insurance for the purchaser and a form of income for the seller.

Posted by lotp 2006-10-03 08:14|| 2006-10-03 08:14|| Front Page Top

#8 Rantburg is no investment blog..

Posted by Clinerong Phinesh7921 2006-10-03 08:29|| 2006-10-03 08:29|| Front Page Top

#9 CP - I think the point of the post is beyond 'investing'; the possibility is that someone with knowledge of a future event that will knock the market down substantially is seeking to profit from it. Follow the money and find who is planning an 'attack' - potentially terrorist attack. If I recall correctly there was some element of this kind of thing just before 9-11.

Posted by Glenmore">Glenmore 2006-10-03 09:03|| 2006-10-03 09:03|| Front Page Top

#10 I agree, Glenmore. In fact, if you look in Fred's archives, he linked to articles about bin Ladin profitting mightily from certain investments made just before the 9/11 attacks. It's still not clear to me if this was an urban legend or real, but certainly something looked suspicious to the cynical.

Posted by trailing wife 2006-10-03 09:35|| 2006-10-03 09:35|| Front Page Top

#11 I think the point of the post is beyond 'investing'; the possibility is that someone with knowledge of a future event that will knock the market down substantially is seeking to profit from it.

Yup. Shouldv'e made that clear in my comment above.

Rational investors who do not have inside knowledge of events that are likely to change the market buy/sell options on the basis I described above.

Those with inside knowledge, OTOH .....

Posted by lotp 2006-10-03 09:58|| 2006-10-03 09:58|| Front Page Top

#12 thanks for the easy to understand explanation of puts, lopt.

I flipped past CNBC this morning. They all had long faces and looked down so I stayed to see what the good news was. Gold, Silver, platinum are waaaay down. Oil down too. (She said, with a very disappointed look, "oil can't keep going down forever" and then they both tried to console themselves that eventually the spigot would get turned off.)

Anyway - I digress. As is obvious, I don't know the stock market - but logically, it makes sense to me that many speculators would use the DOW reaching its new heights as a benchmark to buy and sell. In addition to lopts great comments above, I think what we are seeing is the fact that by going past the old high, the people who play the market are making changes in their plays. Kind of like after the queen of spades is played in hearts.

Posted by anon 2006-10-03 10:32|| 2006-10-03 10:32|| Front Page Top

#13 This is somewhat rubbish.

First, every option (put or call) has two parties: buyer and seller.

To buy a put, that means someone has to be selling in the first place. Someone who is selling puts believes the market will remain flat or go up. Their bet is that they'll collect their put premium and the option expires unexercised.

Therefore, another interpretation of this is a lot of folks think the market is going up and are looking to collect some income from folks who think the exact opposite. But remember, the seller comes first.

Posted by Dreadnought 2006-10-03 10:57|| 2006-10-03 10:57|| Front Page Top

#14 true, dreadnought. An increased number of puts means something is changing. I think the above explanation of an insurance policy seems apt. Looking at gold and oil falling. It's good for most of us, but if you speculated in it, it is risky. When do you sell? These are gamblers hedging their bets. It may be because they anticipate the stock market to go up - not down - and that just means that people start changing where they invest their money.

Posted by Crurt Sneth8456 2006-10-03 12:18|| 2006-10-03 12:18|| Front Page Top

#15 The Dow is at a record high right now and historically October can be a bad month in the market. So people buy puts as an insurance policy to lock in some profits. I don't think there's anthing abnormal about that. Also, I don't know where the writer of the article gets the October 6th date. Options always expire on the 3rd Friday of the month. This month it will be October 20th. I know this because I have lots of calls set to expire. I write calls nearly every month. Sometimes I will buy a puts as a hedge to cover some big gains. If there was fear building people would be buying the commodities.

Posted by Intrinsicpilot 2006-10-03 13:06|| 2006-10-03 13:06|| Front Page Top

#16 Options always expire on the 3rd Friday of the month

The standard ones offered by the large underwriters do. But an option is simply a contract and they can be (and are) negotiated with all sorts of custom terms, including the expiration date as well as strike price.

Commodities are indeed going down right now, btw -- gold and other precious metals bought as a hedge against high oil prices / inflation will come down when that inflation (and those oil prices) don't keep rising.

Posted by lotp 2006-10-03 13:11|| 2006-10-03 13:11|| Front Page Top

#17 Back when I had money, I used to sell puts on stocks I was going to buy (and hold) anyway. Unless the stock skyrocketed, the put would help finance the purchase. I was never into the short-term buy-sell-buy stuff, mainly because I knew I'd screw it up.

Posted by Jackal">Jackal 2006-10-03 13:33|| http://home.earthlink.net/~sleepyjackal/index.html]">[http://home.earthlink.net/~sleepyjackal/index.html] 2006-10-03 13:33|| Front Page Top

#18 The standard ones offered by the large underwriters do. But an option is simply a contract and they can be (and are) negotiated with all sorts of custom terms, including the expiration date as well as strike price.

True but if you think something bad is going to happen right away would you spend the time finding a seller of puts so you can put together a custom option contract to buy? It doesn't make any sense. Also look at the data for the DIA Oct 20th Puts:

http://finance.yahoo.com/q/op?s=DIA

Scroll down to Puts and notice the price on the Puts from $112 to $120. You will see a lot of red arrows. Meaning prices are dropping. Which means LESS people think the market is going down.

Posted by Intrinsicpilot 2006-10-03 13:39|| 2006-10-03 13:39|| Front Page Top

#19 Th market goes up in small amounts with scattered down turns, but the market goes down in one day. This is because of short selling (puts). Personally, I think short selling should be outlawed, but the market pros make money selling short. How, easy, by all selling at the same time, and causing a market collapse. Many investers use stop orders which when hit become sell at market orders,
So, lets say we buy Microsoft at $27.40, and we know that the market is high, we establish a stop order within $.15 or $27.25. Well, after the short sales, the price will spiral downward, and our stops will become sell at market, which by then may be $25.75 and so on until 4:30 PM EDT or the end of sellers is reached. At which time, Microsoft may be $18.50 or about 3 years worth of gains.
If you think this sounds like the stock market is build on a flimsy foundation, welcome to Wall Street.

Posted by wxjames 2006-10-03 14:09|| 2006-10-03 14:09|| Front Page Top

#20 WX,

The situation you described is not a put. Short selling is a completely different animal that involves borrowing shares and selling them. Buying a put/selling a call is being short in the market, but it is not short selling.

If I write a put (the seller) on Microsoft stock with a strike price $20 and someone buys it, and the price drops to $15 or $10 or $0, I have to buy MSFT at $20 if the buyer chooses to exercise the option. His profit is $20 - Current stock price (if he had to purchase the shares to sell to me) - Option Premium.

Unlike short selling, the person who buys a put is only on the hook for the initial option premium; he can't lose anything else. In short selling, you are at risk for both the shares you borrowed and any additional money if the market runs the wrong way (i.e., up, up and away).

Also, market/stop orders are not unique to options or short selling. You play in this game at your own risk.

Posted by Dreadnought 2006-10-03 14:45|| 2006-10-03 14:45|| Front Page Top

#21 There are a lot of hedge funds out there now and they may be buying a lot of PUT options as a risk management strategy.

Posted by mhw 2006-10-03 15:13|| http://hypocrisy-incorporated.blogspot.com/]">[http://hypocrisy-incorporated.blogspot.com/] 2006-10-03 15:13|| Front Page Top

#22 Hehe is it a North Korean investment vehicle? In the mean time the market broke a record and oil goes south big time.....Iran and Venezuela see their GDP drop by the second today......

Posted by Jinese Graique6952 2006-10-03 15:42|| 2006-10-03 15:42|| Front Page Top

#23 Following the links through, I think the original post that started this whole thing misread the October 2006 puts as expiring October 06. They do in fact expire on the Saturday following the 3rd Friday...last day of trading is Friday October 20, official expiration is Saturday October 21.

Posted by Moon6">Moon6 2006-10-03 15:48|| 2006-10-03 15:48|| Front Page Top

#24 Wall Streeters have been superstitious about October since Oct. 29, 1929.

Posted by DMFD 2006-10-03 20:19|| 2006-10-03 20:19|| Front Page Top

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