September 27, 2001 ThursdayNORTH SPORTS FINAL EDITION
Anguish for options traders
BYLINE: By Melissa Allison and Robert Manor, Tribune staff reporters
SECTION: BUSINESS; ZONE: N; Pg. 1
It's always disappointing to lose money when you work in the markets.
But it is especially galling when you believe you were on the opposite side of trades initiated by terrorists capitalizing on their deadly endeavors.
Just ask the people at Specialists DPM LLC, a market maker in options contracts on United Airlines parent UAL Corp. at the Chicago Board Options Exchange.
By Tribune estimates, unusual trading in UAL options shortly before U.S. terrorist attacks two weeks ago might have reaped more than $4 million in profit for investors on the right side of the trades.
Specialists DPM, which was on the wrong side, faces losses of roughly $1 million on those trades, an executive at the firm says.
"We're sick to our stomachs, and more so when I know all those people died," said the executive, who asked not to be named.
He acknowledged that the options buying--which spiked for UAL and other companies in the days before the attacks--might have come from legitimate investors, but said, "I'm not a big believer in coincidences."
"There are so few situations with a deal, takeover or event where there weren't cheaters in options," he said.
In fact, there were some factors present in the market the week before the attack that could have contributed to the spike in stock options. A Wall Street analyst had revised downward loss estimates for airline stocks generally, for
instance, and another analyst downgraded the stock of Boeing Corp., another company whose options trading surged.
Still, those factors do not adequately explain the unusual trading activity involving UAL, Boeing Co. and American Airlines parent AMR Corp., insurance companies and financial-services companies in the days before the Sept. 11
terrorist attack, some traders say.
And market professionals now say that other businesses susceptible to a drop in travel showed odd trading patterns before the attack.
"The stocks of major hotel chains also showed dramatic increases" in trading activity aimed at profiting on a decline in their stock prices, said Philip Erlanger, a technical analyst who studies market sentiment on behalf of institutional investors.
Marriott, Starwood Hotels, Hilton Hotels and others were affected as well, he said. Like airlines, hotel stocks suffer when travel drops off, as it did after the attack.
Like other CBOE traders who lost money on the unusual trades, the UAL market maker holds little hope that his firm will get its money back, even if the trades were terrorist-driven.
"If the exchange finds something, they forward it to the SEC [Securities and Exchange Commission], and then the SEC gives you the song and dance that insider trading cases are really hard to prove," he said.
That bitterness always rankles when market makers believe they were trading against someone with inside information, which happens regularly before corporate mergers or other major news is announced. Traders often do not know until afterwards that they were used, because spikes in options volume happen regularly and for a variety of reasons.
Investors trade on everything from earnings warnings to merger rumors to economic conditions and congressional action, said Paul Foster, market strategist for BeyondTheBull.com, a market information firm in Chicago.
"I see options volume and volatility spikes on a consistent basis. Some are attributable to normal trading environments and some are due to changing fundamentals coming in the market," Foster said.
Sometimes volume spikes occur when they should--after news becomes public--and on other occasions, the surges come early. It is the latter kind that angers market makers and prompts investigations.
A prominent recent example of high options volume following the news was an Aug. 16 spike for United Airlines. The surge in trading of put options--which gain value if the stock price declines--coincided roughly with United's
announcement of a major fare sale and its disclosure that passenger loads had dropped substantially in 2001.
Foster believes the high volume of options traded on American Airlines stock the day before the terrorist attacks could stem from a warning the previous Friday that the company's third-quarter loss would be higher than investors
Traders who are victimized by illegal trading can get their money back under some circumstances, but it isn't quick or easy.
The CBOE routinely reviews trades for indications that someone knew in advance of an event that would affect a stock's price. When the exchange finds evidence that that has happened, it notifies the SEC.