"Last Days of the Bear Disco: Special Revisionist Unit."
By Adam Warner of Daily Options Report — thank you, Adam.
Big piece in Bloomberg today on The Last Days of Bear. And of course the monstrous and highly suspicious put trading in the week leading up to the collapse.
On March 11, the day the Federal Reserve attempted to shore up confidence in the credit markets with a $200 billion lending program that for the first time monetized Wall Street’s devalued collateral, somebody else decided Bear Stearns Cos. was going to collapse.
In a gambit with such low odds of success that traders question its legitimacy, someone wagered $1.7 million that Bear Stearns shares would suffer an unprecedented decline within days. Options specialists are convinced that the buyer, or buyers, made a concerted effort to drive the fifth-biggest U.S. securities firm out of business and, in the process, reap a profit of more than $270 million.
Whoever placed the bet used so-called put options that gave purchasers the right to sell 5.7 million Bear Stearns shares for $30 each and 165,000 shares for $25 apiece just nine days later, data compiled by Bloomberg show. That was less than half the $62.97 closing price in New York Stock Exchange composite trading on March 11. The buyers were confident the stock would crash.
“Even if I were the most bearish man on earth, I can’t imagine buying puts 50 percent below the price with just over a week to expiration,” said Thomas Haugh, general partner of Chicago-based options trading firm PTI Securities & Futures LP. “It’s not even on the page of rational behavior, unless you know something.”
Was this some sort of insider trading? It’s highly likely someone had a good idea that the end was near and traded questionably on that knowledge, I’ll buy that. 
But did this represent a concerted effort to drive them out of business? There’s no way to know the intent behind the trade, but five month’s later you still have to get real here. Can $1.7 million of cheapie puts with one week until expiration cause this sort of cascade in and of themselves? That’s really an incredible stretch. I know they say here "Options Specialists" think so, but it’s like 2 guys they interviewed for this article. I guarantee you if you canvas Specialists and MM’s across the board, they would overwhelmingly find the notion that a cheap put purchase could implode a company to be a tad ridiculous.
Front-running news? Now that’s another story, and likely what actually happened.
Let’s get realistic about the effect of this "bet". The puts had very little delta so thus did not beget all that much stock selling in and of itself. Did that *bet* cause it’s own run on the Bear Bank.
Of course it was an incredibly odd order, and if you were a specialist/MM and sold some, you probably did take some bearish action above and beyond normal. But even given that, it’s still a relatively tiny amount of stock shorting thanks to this.
And besides, didn’t the implosion of Bear paper precede all this? The amount of stock shorted against all the options that ultimately traded probably is nothing more than a rounding error compared to the shorted stock vs. everything else that was going to wallpaper. Were hedgies ignoring the warning signs in the paper, but decided to pull the plug thanks to a cheap put trade? Not bloody likely.
So look, you have two things going on here. The trade was surely based on non-public knowledge of Bear’s precarious state. But they throw around the profit on the original puts as if it’s in sort of vacuum, but isn’t it entirely possible it’s someone hedging a portfolio of terrible paper? Its still probably illegal, but I suspect it’s not so cut and dried given the fact that it’s five month’s later and we have no idea yet who bought them. And there’s nothing the Dick Fuld’s of the world would like better than a perp walk on this very trade.
But whatever the circumstances behind the trade, and whatever the intent of the buyer, did that bet in and of itself cause a chain reaction that took Bear down? That’s an incredible leap.
