Another Study on the 9/11 Put Options

Given the utter trash that passes for research in the troofer community, it is always interesting to see research by actual academics on related issues. One of the topics I have always had a personal interest in has been the put options, on which supposedly the New World Order elites made a killing after the attacks drove down the values of airline stocks. Hey, have to justify that class in options theory I took in b-school somehow. Three academics from Switzerland have come out with a paper on detecting "informed trades" in the stock markets, not just around 9/11 but most of the last decade it appears.

I just went through it quickly, and haven't taken the fine tooth comb approach yet, but from what I understand so far, I am not impressed. It involves an interesting methodology, which they describe as:

According to our method, an option trade is identified as informed when it is characterized by a statistically large increment in open interest and volume, induces large returns and gains, and is not hedged in the stock market. Specifically, for each option the increment in open interest is compared to its daily volume to check whether or not this transaction can be classified as unusual. If so, the corresponding return and gain are calculated over various horizons. When the return and gain are statistically important, the probability that the option trade is not delta hedged is calculated. When this probability is sufficiently low, the option trade is identified as informed. This method is applied to each put option contract on 14 companies in various business sectors traded in the Chicago Board Options Exchange from January 1996 to April 2006 analyzing approximately 1.5 million of option contracts. In total 37 transactions are identified as informed trades: 6 occurring in the days leading up to merger and acquisition (M&A) announcements, 14 before quarterly financial/earnings related statements, 13 related to the terrorist attacks of September 11th, and 4 which could not be identified.

While this makes a certain amount of sense, there is one problem, one which way too many people in finance and economics make, that of randomness in the market. This is another subject which I have always had an interest in, and there is actually a bit of a minor industry in publishing now on the subject. As a short aside I recommend Nassim Nicholas Taleb's Fooled by Randomness and The Black Swan as well as Benoit Mandelbrot's The Misbehavior of Markets, and Malkiel's classic A Random Walk Down Wall Street.

In any case, the problem here is the authors come up with 37 transactions which they identify as anomalies, and call those "informed trades". But they come up with this out of a population of 1.5 million option contracts. With that large of a population, there is no practical way to distinguish what is an actual sign of insider trading, and what is random noise. With that much data there should be a huge number of purely random coincidences, no matter how many standard deviations you go out. Yes, some of those 37 trades may actually be actual cases of insider trading, but just by chance most of them should not be.

Another factor in this lies in whether their methodology is even legitimate. They base this on the assumption that put options which are not hedged against a long position in the stock are speculative, and therefore informed. There are, however, numerous ways of hedging a stock position. As the 9/11 Commission famously pointed out:

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).]

They hedged a short option position, not with a long equity position in the same stock, but in a different industry stock. There are even more ways than this, for example you can hedge a position in airline stocks (a major consumer of oil) with a position in energy companies (a major producer). Even this is aside from the question of whether it is a valid assumption to say that any options which are not hedged must be "informed trades".

Regardless, the one thing I can guarantee is truthers will use this paper to claim it is now proven that the elites knew of the attack ahead of time.