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Monday, June 2, 2008

Lehman Put Open Interest: Just Like Bear Stearns

In my post Slowly Building Shorts I wrote: "I did the same for Lehman Brothers (LEH). I expect the $50 area and the 50 day EMA to provide resistance. LEH is no longer oversold and the same problems, namely expanding Level 3 assets, remain. I expect an initial move into the $38 - $40 area."

Unfortunately I covered my position at my original target of $38 - $40 and have missed this last swipe down. LEH has now broken all support and could quickly and easily spiral out of control...

The open interest in LEH puts is absolutely massive, especially at strikes that would only pay off if LEH completely imploded (a la Bear Stearns). Either some idiots are going to be out a lot of money come June, July and October... or LEH implodes before then...

The open interest is absolutely massive and can only pay off if LEH collapses. Most of the open interest is at sub $35 levels... a level that LEH has now breached. A lot of the puts at the 'bankruptcy' strikes (say anything below $15) also expires in June. So either the put buyers or LEH are quickly running out of time.

Morgan Stanley, Merrill, Lehman Ratings Cut by S&P (Update3): " Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. declined in New York trading after Standard & Poor's lowered credit ratings for the investment banks, saying they may have to book more writedowns on devalued assets.

Morgan Stanley, the second-biggest U.S. securities firm by market value, was cut one level to A+ from AA-, S&P said today in a report. Merrill Lynch, the third-biggest, was also cut one level to A from A+, as was Lehman Brothers, the fourth-biggest. Goldman Sachs Group Inc., the largest of the group, was affirmed at AA-. The outlook on all four New York-based companies remains negative, S&P said.

The downgrades may make it harder for the banks to sell derivatives such as credit-default swaps that are tied to bonds or loans, said Brad Hintz, an analyst at Sanford C. Bernstein in New York. Single-A rated firms are less desirable as trading counterparties for fixed-income derivatives that extend longer than five years, he said."

I say, about time on them there downgrades. I would also like to refer you back to my list of companies with the largest pile of Level 3 assets: Bulltrap: ABCP and Level 3 Bombs.

Yes, just like Bear Stearns, Lehman could implode literally overnight. Enough people think so to have sunk a good deal of money into puts. Open interest has absolutely ballooned. Mind you, the same thing occurred with Bear Stearns options just prior to their implosion. At the time I wrote Bear Stearns is Dead, Lehman is Probably Next.

Will Lehman implode? I don't know. I can't tell... I just don't have enough information. The rumors continue to make their rounds and traders are definitely nervous.




45 comments:

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Anonymous said...

So what would happen to Jan '09 LEAP Puts if Lehman were to be acquired/go bankrupt before they came to expiration?

I'm, um, asking for a friend... yeaaah. ;)

Anonymous said...

If Lehman goes bankrupt counter-parties have to get in line with the other Creditors.
if they are taken over it'll be like Bear Stearns - bail-out of counterparties by the Acquirer - if its the Fed then you'll be protected in full it seems...
But how many of these Banks do the Public need to own, even indirectly? And why should non-market participants lose anything at all even indirectly via Gov give-aways to reckless speculators (oops I mean "Investment Bankers")?
Aren't there more deserving people whom the Gov. can try to "make whole"?

chris said...

how long will the fed and thier owners be able to print money out of thin air just to take over other banks as they did via jp morgan for bear stearns? The former ceo of suiss banks said a few weeks ago, that if the fed did not "bail out" bear that it would have triggered the dollar collapse which would ultimatly lead to virtually every national bank failure in the world. He also said with the interest rates as low as they are, that if another major bank failed there would not be much the fed could do to futher delay teh collapse that is coming. Is this true? What kind of shape are goldman sachs and citigroup in aswell?

Anonymous said...

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jmf said...

Moin from Germany,

just wanted to give a hint that you made it into WSJ´s Marketbeat

Keep up the great work!

Ben Bittrolff said...

JMF,

WSJ indeed.
Thanks for the heads up.
Not the most 'refined' quote they could find... but hey, I'll take it.

Ben Bittrolff said...

Moonwick

Don't worry, you'll be able to sell the puts at fair market value and collect your massive profits... er your friend.

Anonymous said...

Thanks, Ben.

I was worried about looking like a fool for buying far-dated puts that would actually become worthless if the underlying company went under before then...

Considering how long this is taking to play out, it seems more prudent to dabble in the longer-dated contracts.

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