Night Writer - *Off Topic* This one's for you, it's about 'married puts'....
John <ggg>
Heard on the Street
Traders Sidestep the Rules
To Continue Short Selling
By SUSAN PULLIAM
Staff Reporter of THE WALL STREET JOURNAL
As the stock market has turned down, traders say they are
dusting off an old trading strategy, sometimes called a "bullet,"
which allows investors to bet on a stock's decline even if the
stock is caught in a freefall.
The strategy, which involves a complicated trading technique
called "married puts," is especially alluring in a volatile market,
traders say, because it allows the traders to sidestep rules that
prevent short sales, or bets that a stock will decline, when the
stock's share price already is falling steadily.
"Bullets have been coming back into popularity since July 17
[when the market peaked], and it usually involves day traders who
see a stock has broken below a particular trading pattern,"
suggesting its stock will trade even lower, says Jon Najarian,
president of Mercury Trading in Chicago.
A short sale is the sale of borrowed stock in which the seller
hopes to profit from a price decline by repurchasing shares later
at a lower price. Both the New York Stock Exchange and the
Nasdaq Stock Market require that any short sale must take place
when the price is rising.
The rule is meant to curb the impact of attempts by short sellers
to drive a stock's price down through aggressive selling.
On Monday, for instance, traders say shares of Bankers Trust
were hit by bullet traders, who were betting that worries about the
bank's third-quarter earnings would help create a wave of selling
they could profit on. Bankers Trust closed Monday at 54 1/4,
down 4 5/8. Last week, traders were buzzing about reported
holdings of Long-Term Capital Management, including Waste
Management and Ciena, as targets of bullet traders.
Married puts involve the tandem purchase of stocks and put
options. The puts, which like short sales are effectively bets on a
price decline, give the holder the right to sell the stock at a
specified price, or "strike" price. This combination allows the
trader to then sell the stock, leaving him with a bearish bet in the
form of the put, without regard to upticks because the stock sale
isn't literally a short sale.
Regulators have taken a hands-off approach to married puts,
even when they are designed as a bet against a declining stock.
"As long as they are done consistently with the rules, we have no
problem with them," says Edward Kwalwasser, group executive
vice president of the New York Stock Exchange.
The U.S. Securities and Exchange Commission has objected to
married puts in only a few instances. One was a case in 1996,
when Tudor Investment, run by well-known trader Paul Tudor
Jones, paid an $800,000 fine to settle charges it had violated
trading rules. Tudor's problem arose because it didn't execute
each step of the transactions in the right order, leaving it with a
short position and sales that wound up in violation of the uptick
rule, say securities lawyers.
But Wall Streeters call them bullets for a reason. Typically, they
involve a rapid-fire sale of stock that is designed to build on a
wave of selling that has already hit a stock. Even though the
trader may be selling the married-put stock at a loss, the theory is
that he will make an even bigger profit on the put option as its
value rises based partly on the market impact of the aggressive
stock selling.
For instance, traders say, the stock component of a married put
is often sold with an "at market, not held" order, meaning the
broker has been instructed to sell at every opportunity, rather than
holding out for a particular price or easing the stock into the
market gradually as buyers materialize at the lower price levels.
Indeed, some traders say married puts may be adding to the
volatility of some stocks, especially those that have been the
subject of rumors and could be carried lower by a wave of selling
that looks panicky. The Big Board's Mr. Kwalwasser says the
exchange hasn't found any attempts to manipulate stocks with
married puts. But, he added, "We look to see if anyone is
manipulating our markets and if we see any violations, we are
prepared to move forward aggressively."
To be sure, some investors say it isn't clear that bullet traders
carry enough ammunition to make a difference when a stock is
already selling off sharply. But other traders point out that such
"piling on" can have an impact. "You can really crack a stock this
way, especially if there isn't much liquidity," one trader said. "Why
should a few sophisticated trading firms get away with this?"
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