Market’s Going to Drop by 1/3rd? Got Your Tinfoil Hat On? Good!

OK folks, do you have your tinfoil hat on? Are you ready for the impending doom of a stock market crash? Are the terrorists going to destroy the world markets and profit from our worldwide economic collapse?

If you don’t know what I’m talking about, that’s probably a good thing! You saved yourself a few painful weeks enduring some conspiracy theories about a massive trade in the options market. I think a lot of the discussion started at the The Ticker forums on August 1st. I didn’t hear about The Ticker until after I saw this post from at the Financial News and started hitting Google up for more information. The gist of the story is that a mystery trader has bet that the US stock markets, European stock markets, and Japanese stock markets are going to crash by over a third in value by September 21, 2007. I gotta tell you, seeing those headlines did worry me for a bit. Does somebody know something? Do I need to rethink some of my investments?

I started reading the forums to see what I could find out. People were speculating as to what the trades meant. On this and similar forums, I started hearing theories like :

The terrorists made a bunch of financial moves right before 9/11. They shorted both American Airlines and United Airlines. Maybe Osama invested these millions in the options market! This might be a sign of an impending attack! If the markets crash, this will turn the terrorists into billionaires!

Very scary idea. But then how would they collect their profits? I mean, it looks like some of the suspect investing profits (from shorting AA and UL) weren’t collected last time. I can’t imagine that the SEC wouldn’t be all over this one.

I continued reading through the forums to learn what I could from the folks there. The opinions were varied. There was some speculation that it was akin to a high-interest loan for a hedge fund (just performed in a bizarre way using options). Then maybe it was someone who really thought the market was going to crash. That got people speculating about the terrorists. Then I started hearing a whole new slew of conspiracy theories.

Here are just a few the theories that were thrown around :

Gotta save the cats!

Whew! Sounds like some major changes in the next 3 weeks! You can see why we’ve equipped Winston with a new tinfoil hat!

Seriously, while those things might be possible (although incredibly unlikely), I just wasn’t really buying it. Maybe someone was speculating on a crash, but it seemed near impossible to think that someone would risk so much money on something that seemed so very unlikely. There had to be a better reasoning behind this investment.

Then, after all that, CNBC chimed in. From the CNBC article :

Salamone of Schaeffer’s points out that the index options have been “put dominated over the last several months.” And the bets may have as much to do with hedging portfolios — basically an insurance policy you hope you don’t need — as much as outright speculation.

Maybe it isn’t so scary. Finally, today some great thoughts about what really may be behind all these trades at The Money Morning. They basically break it down to 4 theories :

No telling what the real case is (at least not yet). We have no idea who made the trades (at least not yet). And these options don’t mature til later in September (the 21st). The above strategies have a mix where the investor could be betting on the markets going up, or down, depending on what their strategy was. In any case, it’s sure had people talking and speculating.

Most of the possibilities are a little beyond my current financial skillset. I’m not an options player. But this article from Money Morning did give me some relief. At least the aliens aren’t likely to enact any major global economic changes soon (I hope)!