The Register Citizen (Torrington, CT)
Equifax query focuses on who ordered trade
Getting to the bottom of an Equifax options trade that has reportedly piqued the interest of congressional investigators will require an answer to a problem that plagues anyone looking for villains in markets.
Namely, who made the trade. Not the person’s name, necessarily, but whether he came to the market as a buyer or a seller. Getting an answer will be key to telling if the transaction is evidence of illicit intent, or just another weirdly timed options trade that doesn’t amount to anything.
The question is of extra consequence for Equifax, where data show a surge in bearish put contracts weeks before the creditreporting firm disclosed a security breach that sent its stock down 35 percent. CNBC reported Wednesday that a House committee is seeking information on the trades, which Business Insider said could have grossed $10 million.
An Equifax spokeswoman did not respond to a telephone call seeking comments on the options trades. The reported probe is separate from a Securities and Exchange Commission investigation of stock sales by Equifax insiders prior to the Sept. 7 disclosure.
One piece of data the panel will be interested in is whether volume in the options was initiated by buyers or sellers. While puts in their simplest form are wagers that a stock will fall, in the through-thelooking-glass world of derivatives markets, an equally important consideration is whether the trader was bullish or bearish when he entered the transaction.
In short, someone who sold the put — that is, had a bearish view on the contract, as opposed to buying it — would not have made money in the subsequent Equifax rout. While “selling a put” sounds absurd — betting on a decline in an option that itself is a bet on a decline in a stock — it happens all the time. Traders do it when they’re convinced a stock won’t fall and want to pocket the price of the option.
Establishing who makes and loses money on a given options trade is as much art as science. In the case of Equifax, data compiled by Bloomberg show that almost 2,700 puts changed hands on Aug. 21, the most for any day since 2005, including two blocks of 1,250 September $135 puts each. At the same time, some see evidence those contracts were “sold” — that is, a seller approached market makers and asked the options be “written” and purchased from him.
What evidence? Mainly that the two blocks of options changed hands at 70 cents and 75 cents, or near the “bid,” the market price set by a buyer (the options had a bid/offer spread of 70/95 cents). Normally, when a seller initiates a transaction, he must do it at his counterparty’s terms.