Friday, August 22, 2008

Who made $270mil off Bear Stearns' Collapse???

Well, it certainly wasn't me, but I remember seeing a ton of out of the money puts trade in Bear Stearns in early March. I half-joked to a friend that "it looks like someone is betting that Bear Stearns is going out of business -- this week!!".

There's a pretty flimsy article in the UK Independent covering that huge option trade in early March.

The derivatives trade involved put options that gave purchasers the right to sell 5.7 million Bear Stearns shares for $30 each on 20 March, and 165,000 shares for $25 each also on 20 March, according to Bloomberg data. The options cost the anonymous investor $1.7m.

The argument that an investor that risked $1.7million could bring down a firm the size of Bear Stearns is laughable. However, that huge option trade attracted a lot of attention and led many other investors to start scrutinizing the house of cards that was Bear Stearns. No one investor took down Bear, but it did signal the beginning of the end.

The bigger question is why aren't you playing options? Turning $2 million into $200 million in a couple of weeks is a nice return.

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