Blood Money

The Chicago Board Options
Exchange (CBOE),
the biggest U.S. options market, confirmed it is probing
unusual options trading before the terrorist attacks that flattened New York’s World
Trade Center and damaged the Pentagon. There had been rumors circulating that
suspicious trades were made in put options, which increase in value as a stock
or index drops, and perhaps in S&P and related futures contracts as well.

According to people familiar with the situation, securities regulators in the
U.S., Europe and Asia are investigating whether terrorists bought put options,
or shorted stocks or futures, because of their advance knowledge of the
terrorist attacks.

It’s important to note that U.S. Securities and Exchange Commission Chairman
Harvey Pitt acknowledged the rumors, but said, “our enforcement division
has been looking into a variety of market actions that could be linked to these
terrible acts, including the subjects of the rumors.”

Both the CBOE and SEC appear to
be taking a serious look into these rumors, as has the International
Organization of Securities Commissions and the Deutsche Boerse AG (DTB).
An official at the DTB said that trading on Sept. 6 and 7
for Munich Re, the largest reinsurer, were double the average daily volume for
the previous six months, but that the official found nothing irregular.

As an option trader, I look at the volumes of derivatives such as options and
futures and the leverage associated with both as a very tempting point of entry
for someone looking to get bullish or bearish in a hurry. Frequently, insider-type buying or selling evidences itself through listed options or futures. Just
as we knew the T-Rex in “Jurassic Park” was approaching from the water shaking in
puddles on the ground, we know something is up when we see unusual volumes in
options of securities or indices.

Given the severity of these accusations and the potential for any
ill-gotten gains to go toward funding future terrorist activities, I certainly
hope the investigators will look long and hard at any of the suspicious volumes
I note below. If the evidence bears out that the buying of these put
contracts could have been executed on behalf of terrorists or their
sympathizers, we should not only freeze the accounts, but also trace the money
back to its source. Wouldn’t that be wonderful if we were able to catch some
of the bad guys for acting with capitalistic greed instead of religious

Put options in United Airlines
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, American Airlines
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, Morgan
Stanley Dean Witter
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, Merrill Lynch
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, Bear Stearns
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and Marsh & McLennan.

American Airlines

On Sept. 10, 1535 AMR October 30 strike put
contracts (which gave the buyer the right to sell 153,500 shares at $30) traded.
That trade represented five times the total volume traded prior to Sept. 10.
AMR hit a low of $15.89 yesterday, representing a paper gain of over $1.7

United Airlines

In UAL, an unusual order was entered on Sept. 6 to
buy 2000 October $30 put options. Those puts likewise exploded in value from
that date through yesterday’s trading, representing a gain of more than $2
million according to sources at Bloomberg.

Morgan Stanley

Between Sept. 6 and right up to the final day of
trading prior to the disaster, someone was aggressively accumulating October 45
puts, which similarly, went deep in-the-money yesterday, as MWD shares fell to
$42.18 from $49.88. That’s 80 times the previous average trading volume.


With its Travelers Insurance Group facing perhaps $500 million in
claims, you can understand why the buyers of the October 40 put options would
profit handsomely from their short position in Citigroup. Citigroup puts saw
nearly 45 times the previous daily average trade from Sept. 6
— 10.

Bear Stearns

Another Wall Street powerhouse and specialist firm that saw above
average volume in its September 50 puts.

Marsh & McLennan

One of the biggest insurance brokers also experienced unusual put
volumes, as 1,209 September 90 puts traded vs. an average of just 13
contracts on an average day.

Futures Trading

Bloomberg has reported that Japan’s Securities and Exchange
Surveillance Commission is probing futures trade in Tokyo and Osaka. On the
Osaka Securities Exchange, 8,826 Nikkei-225 December futures contracts changed
hands on Sept. 10, compared with a daily average of 1,151 contracts in the
previous week.