You *do* understand...I take it...that with BSC trading IIRC in the 60’s immediately pre-blowup, that several whole new series of puts were created at the 5 and 10 and 15 even (again IIRC) at the 2.5 strike? Right in the middle of the trading month. That is beyond extremely unusual, to create options strikes 50 points OTM on a $60 stock in the middle of a month stock mere days before OE.
Let’s look at some other stocks trading at around 60. HES. $60.66. No puts available below 40 this month, 35 next month, 12.50 January.
JNJ. $60.46. No puts available struck below 30, 50, 20 (Nov, Dec Jan)
CAT $54.57 an odd case, but CAT *WAS* $24 in March. There are $25 puts for Nov, freaking $7.50 ones for Dec!, and $15 puts for January.
Now, we have all seen brand new strikes created for stocks the day after they took massive dumps on earnings or disaster news. Absolutely. Any under-$100 stock that takes a maybe a $10 but certianly a $15 poop will induce the creation of new strikes.
But the BSC case occurred *before* the stock price had moved so drastically, though it was down from $100-$85 (again, this is from memory) I find that unusual, very smoking gunnish.
If anyone wants to write a strike the market makers will create one. They don't care, they can delta-hedge in the cash and cover themselves readily. The demand was created by the fact Bear CDS contracts were trading at default levels. Yes the equity market was oblivious - it often is. There is practically always smarter money in credit and smarter money still in the derivatives than in the cash, in all markets.
The whole premise that the bank would have been sound if only it hadn't been sold is false start to finish. The CDS market correctly saw significant risk of default because people asked to take a company's debt *if and only if it defaults* are hyper-sensitive to the actual probability of default. Common stockholders who are there because it has some index position or the PE looks low compared to other banks in classic "value trap" fashion, are not. Guess who was right?
Yep, I followed the Bear situation very closely. The mkt action in the oppies simply screamed 'Fix!'...but SEC showed themselves to be, as usual, thumb-fingered bureaucratic dorkasauruses. We won't EVER see any action from the supposed 'regulators' on this little caper.
However, on a happier note, when Lehman went south a bit later, I, relying on Bear's action as an example, traded for Tap City from about 26...and got it. Nice little profit, that.