This is interesting. Yesterday around 11:57 am a series of options trades began to execute which culminated in a sphincter-puckering notional $2.8 Billion short on the S&P 500. It is widely believed that this is the reason the S&P went negative yesterday after opening in positive territory. So let's break the trade down and see if we can figure out what's actually going on here.
The Facts: Somebody bought 15,450 May 1995 S&P puts for $~132 apiece, or about $200 million total. In order for this bet to pay off, the S&P 500 has to be below 1,862 on May 16, 2014. So far he's looking pretty good. There are a couple of potential scenarios here.
Scenario 1: This guy thinks the S&P is about to tank. He bought deep-in-the-money puts, which means he's looking for a 1:1 (or very close to it) correlation between his options and the underlying futures. I'm not going to tell anyone their business, but there are more efficient (or at least less costly) ways to achieve the same bet. Which is what makes Scenario 2 the more likely to me.
Scenario 2: This guy is hedging, or neutralizing, a current position. Maybe his book got out of whack and this is something of a balancing transaction. I personally find this to be the more plausible explanation, simply due to the fact that if it were Scenario 1 he way overspent. And you simply don't associate inefficiency like that with somebody who's throwing a couple hundred million at a trade. At least I don't.
Needless to say, the trade was enough to throw a scare into the market yesterday, and it remains to be seen what it was really all about. I'd love to hear your theories. Is the market set to crash and somebody knows something? Or is this just another prop shop who fat-fingered a trade months ago and is now trying to sneak out of it?
What say you, WSO?
Might be a slight reach but could be somebody who has inside information on an impending international event which the market would take badly (Russia-Ukraine?) ? Parallels could be drawn to 9-11? Unlikely but you never know
That would be one hell of a hedge.
FYI, it is the end of the quarter and investment managers/hedge funds may be positioning for 2014 forecasts. Your claim for scenario 1 could easily be destroyed by the quant models I look at becuase to be perfectly honest, sometimes inefficiency is the only solution to make sure the trade goes through effectively instead of tackling less liquid avenues which may ef up the entire transaction as a whole. This was kind of a stupid post since this could have been executed from a variety of Sell-Siders
By stupid post, I was referring to my post sine I don't have clarity on all the trade details.
What possible something could someone know? Only things I can think of that would really move the needle are some sort of domestic terrorism event or F100 default. Or maybe Yellen is about to croak?
Relax Braverman, don't mean to step on your toes today. Easy on the shit throws.
Wasn't me. I was kinda wondering why I got shit.
haha oh gotcha. I mean to be honest, the market taking a dip isn't really that unwarranted.. we just had a candy company IPO.. anyone above the age of 33 things this generation is spinning out of control.
Soros has 11,12% of his total portfolio in SPY puts.
Source? I'm curious.
http://whalewisdom.com/
This is slightly off topic but related to the initial post. You say in Scenario 1 that there are more efficient ways to short the market. I'm kind of curious what some of those ways would be, could you explain?
Just didn't need to go so deep in the money. Could've bought puts much closer to spot for a lot less dough and achieved similar results.
So then you may have answered your own question... with $2.8B to spend, they certainly should've known their other purchasing options. Makes me lean more towards Number 1. @"Edmundo Braverman" Great post and info!
Anyone else think the next "great depression" is going to last about a month?
Was wondering the same thing. Anyhow - I personally think your second scenario is the more plausible one...just some good old VaR and risk management. Trying to picture a scenario wherein someone with deep enough pockets to put $2.8B to work decides that buying puts on the S&P is the best trade they can come up with.
I have some intel from the street that this is Lumina Investments
For those in the know, this is an early candidate for post of the year.
Wonder what those wacky kids are up to these days.
haha this made me smile.
Well, my thoughts with scenario 2, depending on the risk situation, how large of a long position would this person have to have to "adjust" their hedge with a $2.8 billion position like this? (I know there are a lot of parameters, but it would definitely be a huge position to warrant such a large hedging position). Either way, I think the only prudent follow would be to sit back and watch this pan out.
Just to clarify: they spent about $200 million, not $2.8 billion. The notional value of the options is close to $3 billion, but the actual cash outlay to take the position is a fraction of that.
It's still a fucking gnarly trade, don't get me wrong.
Ohh ok. Gotcha. Should've caught that "notional" word when I read your post. Kind of like when you hear people talk about the total notional value of outstanding derivatives contracts being $70 trillion or whatever, but you have to stand back and think about what that actually entails. Thanks for clarifying, but yes, it is a huge move regardless.
It's Buffett... he's finally lost his shit
You never know. Maybe some guy over there wasn't paying any attention to the tournament and decided to hedge the potential payout himself.
Just read a few of the articles about Lumina. I'd send them my resume, but I'm afraid that without any experience in portfolio management I'd be overqualified...
I love their idea of "we don't know much about the 1980's markets, or the 90's markets, but we know these markets and know how different they are..." WTF???
I've tried to follow big options positions in the past and they never seem to pan out.
Is there some clue as to the fact that this isn't a hedge? I know you mention it as a possibility, but to me, a lay REPE guy, it seems much more plausible.
haven't heard "hella" since i was back in seattle
@AndyLouis : Monsieur Braverman is reppin that NoCal pride, yo.
Thought that was more of a New England thing...
Though I think it is a hedge, what if someone really wanted to place a bet of this size? Does it make more sense to take this large position at one time and hope the publicity helps your cause? Or would someone generally be better served to spread the bet across different securities at different times?
Man, for some reason this comment took me back to Roll 212 and Cramer getting busted teaching Aaron Task about fomenting:
The Daily Show
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+1 for that clip!
I'm wondering what is going on with this Cefaratti kid... supposedly been with both of their "hedge funds" in North Carolina, but his LinkedIn profile says that he was studying Financial Mathematics at both UPenn and LSE in 2012... oh yeah, and an acting gig from age 8-18. I guess I should update mine to reflect my couple of years with NASA, stunt doubling for Vin Diesel, and finishing grad school with a PhD in Econ from Oxford all while living here in Florida...
This Cerfaratti is a total pussy compared to jeffrey chiang
Thanks for showing me that... hadn't gotten to the Chiang thread yet. I like his style with the fake email follow up with Ms. Park from BAML --- "Just shoot me back an email when you can." What a douche.
@"Edmundo Braverman" : I have never heard a New Englander say that. Ever.
probably someone hedging. soros bought puts to hedge also
I think of hella as a new england thing, but it definitely gets used in places like Sacramento.
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