Is this "put" option thing something to worry about?

[eridani]

I'm posting this in the hopes that someone with real knowledge will be able to compare it with actual historical data.

http://www.homelandsecurityus.com/

"29 August 2007: In the weeks preceding the 2001 attacks on America, there were very significant financial warning signs that something big – and bad – could be about to happen. Huge surges in purchases of “put options” on stocks of United Airlines and American Airlines, the two airlines used in the attacks, and “put options” on Merrill Lynch & Co., and Morgan Stanley, stocks of two financial services companies hurt by the attack were noted. Put options are essentially “bets” that a stock or stock index will drop on or before a certain date; the larger the drop, the bigger the gain for the purchaser of the option.

Fast forward to the present day, and we have the same type of trading that took place in the days that preceded the 9/11 attacks – but on a larger scale. Nearly $1 billion of “put options” have been purchased, basically betting that Standard and Poor's 500 index will fall significantly by the third Friday in September. A large number of these options have also been purchased calling for 50% decline by September 21, 2007. For example, a 5% drop in the Dow Jones Industrial Average would be the current equivalent of about 670 points. A decline of 11% would equal about 1,470 points in today’s market. Obviously, larger drops, such as a 50% decline, would cause an unprecedented market collapse. Money would be made for the purchaser(s) of the put options – but the same purchaser(s) stand to lose over $1 BILLION in the investment if the market remains relatively static through September 21, 2007.

The questions are: who can stand to lose $1 BILLION, who will gain in the wake of such a devastating collapse, who are the investors, and what do they know that we don’t?"

[soothsayer]

1. no.

[eridani]

5. Why not?

I really am looking for a numbers-based explanation here.

[stillcool]

2. I don't know, but I hope you get an answer...

Don't you have to bet against certain stocks?..and wouldn't there be an obvious tell?

[aquart]

3. Triple witching Friday.

Options and futures expire all at once.

And I'm thinking nobody is expecting good news. Which they should not.

How is it, do you suppose, anyone thinks they can collect on these puts if a major crime is committed? The 9/11 puts weren't collected either, were they?

But keep pushing for mass hysteria. It's so useful.

[sendero]

6. Your crystal ball..

... doesn't work any better than anyone else's. You have no idea what the markets are going to do, so calling anything "hysteria" is bogus.

While I'm not betting on a stock market crash specifically, you'd have to be George Bush cocksure/stupid to rule one out under the current circumstances.

[Duer 157099]

4. How would an attack on Iran affect the markets?

Maybe that's it.

It's always worthwhile to watch the put options.

[A HERETIC I AM]

7. The person that wrote that bit on that website gives no sources and offers no links

which is to me, a red flag. He is making assumptions that appear to be based on a series of other blog entries, most of which are misinformed relating to the activity on one single ETF. An ETF that is, by the way, one of the originals (formed in 1993) is broadly based and well respected.

As i answered in your other thread in GD (That got locked) the heavy activity can be explained by knowing that open interest in a particular strike price for either a Call or a Put can be made up of both buys and sells of that position. If there are 100,000 contracts showing in the "Open Interest" column of an option chain, the reader has no way of knowing how many of those hundred thousand were purchased and how many were written (sold) or by whom.


Here is on of my posts from your earlier thread with links to Investopedia and its explanations for "Spreads"
http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=1728475&mesg_id=1728876
This subject was discussed in another thread on this forum last week;
http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=114&topic_id=27652&mesg_id=27668