Financial News: Mystery Trader Bets Market Will Crash By Third

Smartmoney.com

An anonymous investor has placed a bet on an index of Europe's top 50 stocks falling by a third by the end of September, as world equity markets plunged for a third day and volatility hit a three-year high.

The mystery investor has bought put option contracts on the DJ Eurostoxx 50 index that will result in a profit if it plunges to 2,800 or below by the end of September. Based on the 2,800 strike price, the position covers a notional EUR6.9 billion, and potentially even more using a market price of about 4,100 when the trades were done on Tuesday and Wednesday.

The identity of the investor is unknown but market sources speculated it was either a large hedge fund hedging itself against deepening losses, or a long-only fund manager pressing the panic button to protect its gains.

The investor has bought a total of 245,000 put options on the index. The September put option with a 2,800 strike was the most popular DJ Eurostoxx 50 contract yesterday, according to data from Bloomberg.

Volatility in European equity markets has risen sharply this week as investors cut back on the amount of risk they are taking. The VSTOXX index, which measures the volatility of the DJ Eurostoxx 50 index, hit 34 this morning, which is more than double its three-year average.

Similarly the volatility of the U.S. stock market was trading at almost three times its three-year average, hitting 30 yesterday.

However, both indices continue to trade below their 2002 highs.

European stock markets were trading down almost 3% at by 1300 GMT today, after large drops in Asia and Australia overnight. The Australian market fell 300 points at one stage when futures trading was suspended for over an hour and traders were forced to hedge positions by selling physical stocks rather than futures.

An analyst at Goldman Sachs JB Were in Australia wrote: "I think I shall remember this day as the day that I saw the market go to hell, look into the abyss - didn't like what it looked like and then came screaming back up as far away from there as it could get...It was a truly spooky day and I've seen a lot over the last 20 years but today will be one that anyone who saw it will never forget. But this is what market bottoms are made out of."......