JPMorgan's Spectacular Whale Fail Was Preceded By Unusual Options Trading Activity

By Steve Smith

Put options on JPMorgan were unusually active ahead of yesterday's announcement of credit-trading losses.

It appears that once again someone's bunny had a good nose and they dug into the option patch to bring home a bunch of tasty carrots just in time for Mother's Day. Yesterday afternoon following the close, JPMorgan (JPM) held a surprise conference call to announce significant losses in structured-credit trading. Before that, the JPMorgan May $41 put options -- the weeklies that expire today -- saw 13,843 contracts trade. Prior open interest was just 4,370 contracts, so this was nearly three times the prior open interest. This morning, open interest in that strike came in at 7,100 contracts, nearly doubling. And according to ISE data, 65% of the transactions were done at the offer price, suggesting fresh buying. The puts traded between $0.22 and $0.50 over the course of the day with the largest transaction being 500 at $0.35 per contract. This morning, those puts were trading around $3.80 per contract. Back-of-the-envelope math would indicate that if, for example, one trader accounted for 65% of that volume, the profit potential is somewhere in the $24 million range for that lucky fella. Now I'm sure much of it was just normal trading ahead of today's weekly expiration, but it should be noted that above average volume that exceeded prior open interest also occurred in today's $41 puts, which jumped from $0.40 to around $2.90, as well as the $40 puts that expire next week. I'm not saying anything untoward happened here, but this appears to be something more than simple hedging.

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