Wednesday, May 03, 2006

Sell This Theory Short

I am taking a class in financial options currently, so I found this topic interesting. At the 5-6 minute point Loose Change delves into the secret world of the financial markets and their shadowy connections to 9/11, with the following claims:

September 6th, 2001, 3,150 put options are placed on United Airlines stock. A put option is a bet that a stock will fall. That day, put options were more than 4 times its daily average.

September 7th, 2001, 27,294 put options are placed on Boeing stock, more than 5 times the daily average.

September 10th, 2001 4,516 put options are placed on American airlines, almost 11 times its daily average.

Of course no source is given for this information, just a blurry screen capture of a blog. An Internet search was able to find the claims at the Chicago Tribune. Apparently this is accurate, but this has already been proven insignificant by the 9/11 commission, which reported:

There also have been claims that al Qaeda financed itself through manipulation of the stock market based on its advance knowledge of the 9/11 attacks. Exhaustive investigations by the Securities and Exchange Commission, FBI, and other agencies have uncovered no evidence that anyone with advance knowledge of the attacks profited through securities transactions.130
With the following footnote:

130. Highly publicized allegations of insider trading in advance of 9/11 generally rest on reports of unusual pre-9/11 trading activity in companies whose stock plummeted after the attacks. Some unusual trading did in fact occur, but each such trade proved to have an innocuous explanation. For example, the volume of put options- investments that pay off only when a stock drops in price-surged in the parent companies of United Airlines on September 6 and American Airlines on September 10-highly suspicious trading on its face.Yet, further investigation has revealed that the trading had no connection with 9/11. A single U.S.-based institutional investor with no conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy that also included buying 115,000 shares of American on September 10. Similarly, much of the seemingly suspicious trading in American on September 10 was traced to a specific U.S.-based options trading newsletter, faxed to its subscribers on Sunday, September 9, which recommended these trades.These examples typify the evidence examined by the investigation.The SEC and the FBI, aided by other agencies and the securities industry, devoted enormous resources to investigating this issue, including securing the cooperation of many foreign governments.These investigators have found that the apparently suspicious consistently proved innocuous. Joseph Cella interview (Sept. 16, 2003; May 7, 2004; May 10-11, 2004); FBI briefing (Aug. 15, 2003); SEC memo, Division of Enforcement to SEC Chair and Commissioners, "Pre-September 11, 2001 Trading
Review," May 15, 2002; Ken Breen interview (Apr. 23, 2004); Ed G. interview
(Feb. 3, 2004).

Now it is a bit much to expect a bunch of 20-something amatuer filmmakers to be a experts on derivatives trading, but the least they could do would be some basic research, for a movie that claims over 2 years of research. Put options, are considered by the layman as some devious way of profiting off a companies troubles, but in reality they are actually often used as insurance. Large institutional investors, such as "hedge funds" will buy stock in a company (going long) and then take out a put option at a fraction of the price on that same stock to hedge against its fall. In fact, this is where the term "hedge fund" got its name in the first place.

In fact they are even being misleading as to the significance of the amount of the options. Options, as their name implies allow you to purchase an option to buy or sell stocks in the future. Because of this you are able to purchase them at a much lower price than the actual stock, which makes them popular investment tools. Because there so many types though, their volume can vary wildy, some days thousands of a particular option will trade hands, other days only a handful, so referring to an average volume, without a wider context is meaningless.


At 16 June, 2006 08:07, Blogger Ryan said...

I understand that the burden of proof lies with those over at Loose Change, but your above statement (the snippet from the Joseph Cella interview) does little to disprove what LC asserts.


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