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Tuesday, August 28, 2007

Doomsday scenarios: put off investing?

OK, I'm not much of an investor, but time is money and I know how to waste the former by following increasingly paranoid internet links. Who doesn't enjoy a good conspiracy theory?

First, the background. Somebody is betting big bucks that the European stock market is about to tank. This news is from Smart Money, August 16 and apparently references a financial news piece owned by Dow Jones:
An anonymous investor has placed a bet on an index of Europe's top 50 stocks falling by a third by the end of September, as world equity markets plunged for a third day and volatility hit a three-year high.

The mystery investor has bought put option contracts on the DJ Eurostoxx 50 index that will result in a profit if it plunges to 2,800 or below by the end of September. Based on the 2,800 strike price, the position covers a notional EUR6.9 billion, and potentially even more using a market price of about 4,100 when the trades were done on Tuesday and Wednesday.
That's 245,000 put options for those keeping score.

And EUR6.9 is currently worth about 9.4 billion U.S. dollars.

To me, that seems like quite a lot to risk on the idea that the market is going to collapse by one-third in September.

August 27, CNBC reported a similar phenomenon in the U.S, though the amounts at stake are much smaller -- and the expected collapse is not as great:
So far, over $500 million in so-called put options have been purchased betting that the benchmark Standard and Poor's 500 index will tumble anywhere from 5% to 11% in September. Some investors are even buying put options calling for 52% decline.
The story says that this volume is on the high side:
Of course, there are always investors betting on big declines -- they're called bears. What's unusual is the amount of money being put up on such a doomsday scenario.

"The activity in those puts has been a lot more aggressive then we have seen in the past," said Bill Lefkowitz, options strategist at brokerage firm Finance Investments.
I've seen speculation about the same sort of large put option trading in Japanese markets too, but have been unable to confirm them with a more credible source.

In any event, what is causing this kind of pessimistic U.S. and European market speculation? Well, it could simply be a large hedge fund (and some copycats) trying to protect profits against a huge market "correction." These could simply be savvy investors who think the market is highly overvalued.

Or, if you believe what you read on the internets, it could be a forecast of "another 9/11 within 4 weeks."

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