$900 Million Option Follow Up

The $900 million option on the SPY (referred to in a previous post) expires today. At first it seemed as if an anonymous trader/institution was informed or was part of a potential market shakeup. However, contributing editor, Keith Fitz-Gerald of MoneyMorning.com has shed light on the trade that had trading chat rooms buzzing.

Of course many of you know that I am not options savvy and since many of you have talked to me on the phone you know that I have never claimed to be. Although the explanation for the “Bin Laden” trades has gone over my head, I do understand that there was logical justification.

Here is an except from Fitz-Gerald's article “The '$900 Million Conspiracy' Trade That Wasn't?”...

But as a professional trader, I could see that it was very possible these were set up as a so-called “box-spread trade.” This is a highly specialized transaction that professional traders or sophisticated institutional investors use on occasion to “box” in the market and guarantee profits, risk or, as may be the case with this trade, financing.

Without boring you with the details, here’s what you need to know about how this type of trade works. Basically, the counterparties, in this case a buyer and a seller, agree to a trade at a price that essentially splits the difference between current interest rates or prices. The price the trade takes place at is really is a moot point.

What’s important to understand is that the seller benefits because they essentially get to borrow the money from the buyer at a slight discount to prevailing market rates, while the buyer is able to keep his money moving in what is essentially a cut-rate loan at a time when he probably can’t lend it to others at all and risks it standing still – the kiss of death for a financial firm that depends on its liquidity for daily operations.

As it turns out, that is just what it apparently has turned out to be…a box-spread trade of some type.”

-Keith Fitz-Gerald of MoneyMorning.com

The anxious butterflies in my stomach disappeared after reading this follow up article. Those of you who thought, "there has got to be a logical explanation," well here it is. Those of you who thought, "there is something strange going on and who's involved," sorry (but the conspiracy theory sure is interesting to think about).