Wall Street Insiders Place Bets On “October Plunge”

| October 9, 2007

October is Wall Street’s least favorite month. The big drops in points tend to come in October, and it seems that the Wall Street insiders are smelling something coming in the wind. From Bloomberg:

Oct. 8 (Bloomberg) — Skittishness over the U.S. stock market’s record-setting rally is reaching a crescendo among options traders who are preparing for a crash.

Investors are paying the most ever to protect against a drop in the Standard & Poor’s 500 Index, data compiled by Morgan Stanley show. The gap between the price of so-called put options on the benchmark for U.S. equity and the cost to wager on further gains has averaged about 8 percentage points since August. That’s more than the previous high in July 2001, before the index dropped 34 percent and fell to the lowest this decade.

“Battle-scarred investors are buying some insurance this time around, having the benefit of hindsight,” said Jack Ablin, who oversees about $50 billion as chief investment officer at Harris Private Bank in Chicago. Ablin said he bought put options for clients during the rally.

The gap shows there’s “an awful lot of nervousness,” said Mason. “A lot of investors don’t want to get caught out.”

What is happening here is the traders and fund managers are beginning to suspect the huge run up in the last 12 weeks might have been all foam and fluff. They recognize that if the market is going to blow off the foam, October is a great time to do it, and to many this period of time where stocks continue to soar in spite of some systemic weakness in segments of the economy does not add up. Now I am not one of these who think the market should be plunging, but last week we saw new highs in the face of Citibank declaring enormous losses from speculation run wild. Clearly there is something that is driving stocks higher, but the smart money now seems to think that something will stumble soon.

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Category: Economics

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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