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.
UPDATE: Syn notes in the comment section:
Bill Roggio noted recently that many of the Islamist training camps now located in Warzistan have all but emptied out, much like what was observed when Islamist training camps were emptied out a month before 9/11/2001
UPDATE: Dispelling the Bin Laden Options Trades (hat tip David)
The blogosphere and options trading desks have been rife with speculation about these trades, which are unusually large bets that the market will make a huge move in the next month. Some entity, or entities, has taken a large position on extremely deep in the money S&P 500 options, both puts and calls, that won't pay off unless the market undergoes an extremely large price move between now and the options' expiration on Sept. 21.
However, Dan Perper, a Partner at Peak 6, one of the largest option market makers and proprietary trading firms, has confirmed that the trades are part of a "box-spread trade."
"This was done as a package in which the box spread was used [as a] means of alternative financing at more attractive interest rates" explained Perper.
Simply put, two parties agree to trade the box at a price that essentially splits the difference between current rates.