Thursday, August 14, 2008

Unusual Activity in Financial Puts Bought for September

Yesterday there was strange activity in the out buying of Bank of America. A large number of fairly out of the money puts were bough for both August and September. For example, while the stock closed the day at $28.86, there were 60,000 August 25 puts traded. Those puts closed at roughly $0.13. In terms of $ spent, this amounts to approximately $780,000.00.

Where there is a buyer there is a seller, so could it be that the seller was a market maker trying to pocket the premiums as most options expire worthless. But to sell 60,000 puts still requires a major buyer, or buyers, in order to avoid causing a drastic drop in the value of the premiums. Maybe someone knows bad news are coming in the next couple of days, may be not. Because of the very short time to expiration (this Friday) the premiums are quite low. It is difficult to know what was going on.

This study instead focuses on the September puts in most of the financial institutions, as well as MCO and the popular XLF ETF. It looks at the total number of puts bought, at the out-of-the-money puts, and at the deep out-of-the-money puts traded today.

Total number of puts bought, as well as a rough estimate of the $ spent (based on the closing price):

The total number of puts traded is 288,928, for a $ figure of $59M. BAC puts are approximately $9M, comparable with MER and GS and XLF. This is also illustrated by the chart below:

Now let's look only at the number of puts that were out-of-the-money:

The total number of OTM puts is 208,639, for an estimated $ figure of $22M. BAC's share is now $5M, much higher than all the other institutions (except XLF itself).

Finally, let's look at the deep out of-the-money puts, defined as being more than 20% below the closing price.

This is where things get really interesting. BAC's share is now $1.4M out of the total $2M traded. The next one is MER with $147k. The following chart illustrates well the difference between BAC puts and the rest of the institutions:

You can see below the actual traded numbers for each strike price in AIG, AXP, and BAC.

Please click on the image to expand.

You can see over 19,000 September 22.50 puts and over 4,000 September 20 puts traded - today alone.

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