Thursday, January 15, 2009

More on the 9/11 Put Options

I have always had a personal interest in the 9/11 put option theories, a result of all those finance classes I took in b-school no doubt, so even though this was one of the weaker theories to begin with, most of it had been explained in the 9/11 Commission Report, I was interested to see some additional details in the recent document dump.

First of all, the press misreported much of this. For some reason troofers seem to think the media is infallible, when it benefits them.

When asked if anything initially looked suspicious, Cella said some of the option trading numbers in UAL and AMR looked suspicious at first blush, before the SEC investigated and understood the trading at issue. At the same time, he said the numbers were never as suspicious as reported in the press. Specifically, he said press reports typically doubled the options trading volume over the actual volume. He said the mistake likely resulted from the Options Clearing Corp's (OCC) public web site, which lists both sides of a trade (buy and sell) as separate trades. Thus, a reporter checking the web site for trading volume could easily overstate the trading volume by a factor of two. In addition, Cella said the trading volume on a given day includes both buys and sells. For example, the 2,282 AMR puts traded on 9/10/1, as reflected in the SEC report, includes puts sold by customers as well as puts bought by customers.

As explained before, much of this volume was part of a hedge strategy anyway:

A U.S-based investment advisor registered with the SEC purchased 2,000 UAL puts on September 6, constituting 96% of the volume. The SEC's Eric Ribelin and Andrew Snowden interviewed both the CEO of the advisor and the trader who executed the transaction. They received the innocuous explanation for the trade which is set forth in the SEC report. [See Report at 9 (explaining the advisor manages hedge funds with $5.3 billion under management, was pursuing a bearish strategy with respect to most airlines stocks in response to recent bad news announcements, and had actually purchased 115,000 shares of AMR on September 10, believing the negative information on AMR was already reflected in the price).]

And now we finally find out what newsletter recommended buying puts. Undoubtedly they will now be added to the incredible vastly improbable ranks of the conspirators.

The SEC determined that the unusual volume in AMR puts on September 10 largely resulted from an increase in the October 30 puts series. Investigation revealed that Options Hotline, a California newsletter, edited by Steve Sarnoff, recommended the purchase of this series in the issue emailed and faxed to its 2000 subscribers on September 9, 2001. The SEC interviewed 28 people who bought the October 30 puts, and 26 of them cited the Options Hotline. The SEC saw that 27 additional individual purchasers of the October 30 series of AMR on September 10 were also Options Hotline subscribers. The SEC interviewed Sarnoff, who explained the basis for his recommendation.

Another report also touches on the "mysterious unclaimed put options" which as we have said before, are not mysterious, they just had not expired at the time they were reported on. Thanks to MikeW and Lapman at the JREF forum for pointing these out for me.

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