Brian's Brain

The short answer: Probably not.

Hal Turner was reporting (and scaring people) into thinking someone had bet nearly $2b that the market was going to crash by Sept. 21st. He (incorrectly) reported that if the market did not crash, they would lose everything. If it did crash, they would make billions.

Sort of... Hal doesn't understand options very well. Here's how it actually worked..

The big scary options trades we heard about were actually someone selling calls... this means they already have their money (about $800m was deposited into their brokerage account as soon as they sold the contracts). The amount of money they end up getting to keep on that $800m depends entirely on how much the market declines.

• If the market stays EVEN, they will have to give it all back (effectively creating a net-zero gain/loss scenario, other than transaction fees)
• If the market goes up, they will have to pay back MORE than the $800m (creating a scenario where they will lose money -- the amount will be proportional to how much the market goes up).
• If the market goes down, they will have to pay back only SOME of the $800m... If the market goes down by more than 30%, they get to keep it all.

In other words,because they sold calls, their maximum profit is the original $800m -- but their potential losses are unlimited (depends on how high the market goes before the contracts expire on September 21st).

It's also worth pointing out that's it's extremely rare for someone to place trades like this "uncovered". In the options world, there's usually an opposite bet that the market will do the opposite, just in case the first bet fails. This is called "hedging". In fact, most brokerages won't let you sell "uncovered calls" unless you have a huge amount of cash in your account. Unfortunately, while the two trades are generally executed at the same time, there's no way to know if this was a covered call or not since the two are treated as separate, private transactions.

Also, these calls were deeply "in the money" (it's a long story what that actually means, and it's getting late -- but essentially that means the seller wasn't willing to gamble much). All things considered, if you were betting the market was going to crash, this was a very conservative bet.

Now, if someone were really willing to bet $800m that the market was going to completely crash, rather than selling deeply in the money calls, they would have bought deeply out of the money PUT's... Effectively, this means their maximum loss would be the $800m they put it -- but their maximum gain would be potentially unlimited (the more the market falls, the more they would make -- possibly even 10x to 50x return on their investment) -- but they didn't do this. They took a much more conservative approach. Don't you think if they KNEW the market was going to crash they would have wanted to turn that $800m into.. say... $8b? That would be pretty easy to do (by buying puts instead of selling calls) if they really believed it was going to crash.

This movement does NOT feel like someone betting on a market crash (they played it wrong if that's their bet). In fact, it feels more like someone betting the market will either stay flat, or dip a little. My personal opinion is that this is a large financial institution, or a mortgage company who's hurting for cash, that decided to use this as a clever way to take out an $800m loan on the back of the market. It's a pretty safe bet that the market isn't going to skyrocket before September 21st... so as long as it stays the same, or even dips a little, they will have taken out an $800m loan without having to cause panic to the public that they needed the money (and risked the media having a field-day with it). This ends up being an expensive loan (with transaction fees) -- but not nearly as expensive as the impact it might have on a stock price if the public found out you needed to borrow $800m.

Also... the 1.78 billion number being thrown around seems more ominous than it really is -- this refers to the value of the stock being controlled by the contracts, not the "bet" itself.

What about the trades on the Euro index??

This is a different trade..and NOT the one I'm referencing above (the calls above were placed on the S&P index here in the U.S. (Reference can be found here)

The trade this article refers to was placed on a European index. THIS one is potentially more ominous.. They did buy PUT's (which is what I said would happen if someone was REALLY serious about betting on a crash)..... although the guys writing these articles like to find the biggest numbers they can to inspire fear.... Just to put this in perspective, I've got one set of PUT's on the QQQQ (Nasdaq 100 Index) that I paid $1,000 for.... This $1,000 controls $700k worth of stocks. If they were writing an article on me and my bet, they would have used the $700k number -- not the $1,000 number, even though I only have $1,000 at risk.

Apply that same ratio to these trades and you've got someone who probably invested around $4.9m... I don't know what they paid for the options -- I'm assuming around $0.20 per share * 245,000 contracts [100 shares in each contract] and you've got a $4.9m bet -- that's a BIG DIFFERENCE from the $6.9b the fear-mongering media is tossing around. If they're right on their $4.9m bet, they could make 5x to 10x (or more) on their money. If they're wrong, they'll lose it all.

These articles are really bolsering up the amount of stock being controlled by the contracts (which is not a reflection of how much money they actually bet), which is why they start tossing around the word "billlion". They have options in $6.9b worth of shares -- but they can't make that much money, nor did they bet that much money (not even close). Remember, even a little guy like me can use $1,000 to have options in nearly $700k worth of stock.

Also, there ARE rational theories for this (the article points out two: a hedge-fund protecting against losses, or a long-only fund manager pressing a panic button). Pre-cursor to terrorism is also a very real possibility on this particular trade -- but it would be a pre-cursor to an attack in Europe, not the U.S. (if the U.S. was the target, why would they short the Euro index??)

Someone DEFINITELY bet a lot of money that the European market was going to crash in September, I DO NOT want to discount that fact -- but it was closer to $4.9m -- this is much more in the range of something a financial institution might spend to hedge against worsening market conditions. $5m is nothing to them, and conditions are definitely worsening.