Distressed Volatility

I wrote about the DXD put option open interest configuration last night when I saw there was a HUGE chunk of puts open at the 67 out of the money strike. Also overnight Dow futures were up 119 so I thought this could actually work out if it was speculative in nature. However this morning the open interest did not make sense given yesterday's volume. It looked like it could've been a buy to open error in the SEP 67 PUT Open Interest because it showed 9,527 OI on Tuesday (9/16), 77 contracts traded on Wednesday, and 760 OI on Wednesday (9/17). Open interest updates on the next day. The volume of 77 on Wednesday would not have closed out 8,767 contracts. Plus they were out of the money at the time so they would not have been exercised. There must of been blocks that should've been closed rather than opened to create such a large open interest number..I wish I saw the volume on 9/15.

Last night I posted this picture of the SEP put option chain for Tuesday (9/16) and also had the visual open interest configuration which showed the huge put block at the SEP 67 strike (at the bottom). This of course stood out as it was a huge signal for a bearish DXD trade since someone was willing to pay $952,700 to have the option to sell 952,700 shares at $67, or $63.8 Million, if it was in the money. The crazy part of it is the option was actually IN THE MONEY TODAY! The DXD closed today at $65.50 down 7.25%! So did anyone end up getting paid here?

Chart Source: Yahoo Finance 9/17/08

Chart Source: Yahoo Finance 9/18/08

Chart Source: Schaeffers Research

Obviously there was some kind of trading error at the options exchange, but these are important market signals and should be right. By the way if you want to learn about this read McMillan on Options by Lawrence McMillan.