what do you make of this

It has internet chat rooms absolutely abuzz. It has evoked conspiracy theory fears of the most frightening nature. But it has not made news in any of the traditional media outlets. It is, in short, a total mystery.


Last week a transaction was posted in the US SPY options market of an astonishing US$900 million in value. The SPY (or "spyder" as it is called) is an exchange-traded fund which replicates the S&P 500 index. 12 million call options ranging in exercise price from 600 to 950 have been bought/sold (and thus created) by parties unknown. The S&P closed at 1474 on Friday. The options expire on September 21. This represents a three-week bet on the market being 35% to 60% lower in that time.


What has the crazier element of the internet chat room fraternity in a frenzy is a transaction that occurred prior to September, 2001. Somebody came into the market and bought an extensive number of put options on US airline stocks. After September 11, those positions would have booked some US$50 million in profit. Quite sufficient, one would assume, to cover the cost of certain terrorist activities.


But the reality is that there are so many reasons this option trade has been transacted, it's impossible to settle on one conclusive reason. This is why, suggests Keith Fitz-Gerald of Money Morning, the story has not been published at respected media outlets. There are too many unknowns, too many rash conclusions to jump to, and no one to interview.


Among various possibilities, Fitz-Gerald offers four as a cross-section. Two benign, two sinister.


On the benign side, it could just be a dividend play, popular with hedge funds. As option instruments don't receive dividend payments there are plays to be exploited just in the same way traders try to strip dividends out of the banks and other stocks each season in the Australian market. Or it could be a "covered call" play. While such trades usually involve the sale of out-of-the-money calls to enhance returns on long equity positions, some large funds prefer to operate within the safety of in-the-money-calls.


On the sinister side, one theory is that China has been caught up in the subprime mortgage debacle far more extensively than has so far been disclosed. In the meantime, the Chinese stock market has not corrected, but continued to rally blissfully on throughout the turmoil. Could the Chinese government be readying itself to start dumping US dollars? This would cause havoc in the US stock market and a profitable offsetting trade for the Chinese.


Or, of course, it could be Osama Bin Laden.


One thing is for sure - this transaction would not have gone unnoticed by those who should take notice. The US government, amongst many of its clandestine spook outfits, has a unit colloquially known as the Plunge Protection Team.


Whatever the reason, this is an unusually large trade at a surprising level. However, there are just as many simple explanations as there are conspiratorial ones. Should we be worried? No one has any idea.