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Chicago: Option traders on Friday braced for more turbulence in the shares of Bear Stearns after the investment bank was forced to turn to JPMorgan Chase and the Federal Reserve for emergency fin-ancing.
Shares of Bear Stearns closed down about 45.9 per cent to $30.85 on the New York Stock Exchange. The slide in the shares prompted options market makers to add several new series of put and call options at the start of the session.
Most notable were newly added calls and puts from the $22.50 strike all the way down to the $5 strike in the front month of March, which goes off the board next Thursday.
The demand for Bear Stearns options pushed up its March at-the-money implied volatility, the expected magnitude for its share price movement as conveyed by option prices. Its implied volatility was about 335 per cent at the close, after briefly topping 700 per cent on Friday morning, according to Jon Najarian, a founder of Web information site optionmonster.com.
"These high levels are still reflecting extreme risk and continued expectations of violent price [share] movement," Najarian said.
Options in Bear surged last week on liquidity concerns. Volume was heavy on Friday as roughly 446,000 puts and 312,000 calls traded, nine times the normal level, according to analytics firm Trade Alert.
Liquidity concerns
Options activity also was heavier than usual in investment banks Merrill Lynch and Lehman Brothers, favouring the put side.
Data from Trade Alert showed that about 279,000 puts and 64,000 calls crossed the tape in Lehman, four times its regular volume. In Merrill, roughly 132,000 puts and 49,000 calls changed hands, twice the normal volume.
"It's a troubling situation at Bear Stearns. Option traders took this bailout from the Fed and JPMorgan as a signal of the gravest order," said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.
Bear Stearns announced that the Federal Reserve and JPMorgan agreed to provide secured funding for up to 28 days. So it is not surprising that market makers added new strikes below a strike price of $25 to protect against any further sharp decline in Bear's share price, she added.
Darst also noted the price of the March $35 straddle, an options strategy that entails buying both a call and a put with the same strike price and expiration, was about $13 a contract, more than one third the current share price.
That indicates that the market is bracing for a $13 swing (up or down) in Bear's shares in the near term, she said.
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