Real or Rumor? $4.5 Billion in "Bin Laden Trades"

Is it silly? I'm not sure. There is some of my opinion in the analysis, but otherwise there is a lot of facts in there. Looking at it again I have to say it is a lot of information, of which, I am not sure is being presented in the best way...but after a few weeks of following the story I think it explains both the rationale for the fears as well as why many financial analysts think everything will be fine. However, no one has come up with an explanation as to why someone might want to make such an unusual transaction. That being said, it's hard to say why anyone makes a particular investment decision -even if we want to abide by Adam Smith in that we are all rational consumers at the end of the day.

As for it being gossip; I think that's a fair statement, but that's the point of the article. Sometimes it is just as important to try to dispel gossip via news & facts as it is to ignore it. In this situation, I think the topic is complex and it would help some people if they knew a little more about it in order to help quiet people's market fears or stop the rumors that there will be a terrorist attack because someone is betting that there will be -as bets don't always turn out to be winners.

It is a fact that someone (single entity, not necessarily one person) gained $50 Million in trades placed against American and United airlines once the market reopened after the September 11 attacks. The put options were considered very unusual and many people talked about it in the weeks leading up to September 11. I make no speculation on whether or not that entity knew something -in fact, for many reasons I think it was a coincidence. Simply because there is not enough information one way or another to insinuate it was anything other than an outstanding unusual trade that paid off.

The current issue -and why I think it is news- lies in that it is the second time that put options at an unusual volume have been placed. More importantly, they are directed at the entire S&P 500 vs. just a few companies. This to me makes it less of a terrorist situation or insider trading, and more of a calculated tactic. I think it is just a coincidence the 30-days falls within the September 11 anniversary; again ruling out terrorism. If we look at the initial dollar amount, $700-$900 million -we can really start to rule people out. One could argue that if an oil-rich Middle Eastern country was backing a terrorist attack, they have the means and desire to gain financially...I think that's a little far fetched here for many reasons I already stated. In the previous account of puts placed against airlines we were talking about relatively small dollars. Now? We're talking about someone with a large amount of discretionary income. Exceptionally wealthy individuals (with aggressive investing appetites), large corporations and countries. There are few, if any, individuals that would be willing to wager an odds-out bet this size. Few corporations, or more importantly, the board of directors at few corporations could stand to make a decision like this and face the shareholders in the aftermath of a loss of this size.

While this is just very crude game theory and deductive reasoning, I still feel that all signs point to a country as the primary individual making the initial purchase of 65,000 contracts (the 55,000 contracts discussed in the article were the net result after the removal of box spreads). At this point, it is pure speculation on my side to relate it to China, only because I don't feel any of the other information points to insider trading or terrorist activity. Around the same time the put options were placed, China was admitting (article cited at bottom, two Chinese officials warned that China may manipulate the US dollar. Again, this is my own opinion, but I really feel this was a poker game between China and the US. If I were China and I was going to make those threats, I would want to have a backup plan in the event I go through with my threats. This is where I point at the put options.

Most of the online chatter connecting the options to China has been in regards to it being a "primary plan", however, that just didn't seem tactical to me. The immediate affects would be a gain on their put options -but what would they stand to lose? The global economy would be in turmoil as many people would pull out of other markets fearing a backlash and creating a self-fulfilling prophecy if you will. Considering the recent issues in trade in addition to sub-prime lending losses suffered by China lead me to think most opinions were wrong. If China did own the put options, then it was a alternate plan. 

Does any of the above make it news? I think so in many aspects. Google trends listed "bin laden trades" as #1 this morning. Somewhere in the world, people are searching for more information on these trades. Most major news outlets have looked past it and the blogger & trader community has been left to put out their information -right or wrong.

One last comment:  

If we look at the volume of put options historically we are looking at 120,000 contracts vs. 819 the previous year the same week. Even when you pull out the box spread you have 55,000 vs. 819; a 6,615% increase. Statistically, this is astounding and newsworthy on it's own right.