Knight Capital becomes hot options play after trading problems

NEW YORK Wed Aug 1, 2012 3:25pm EDT

NEW YORK (Reuters) - As Knight Capital Group (KCG.N) shares plunged quickly following trading problems that roiled the market on Wednesday, the options market got busy, scrambling for bets that expect further decline in the stock.

Erroneous trades on the New York Stock Exchange at the open sharply raised volatility in dozens of stocks, even triggering halts for several issues - Corelogic Inc (CLGX.N), China Cord Blood Corp (CO.N), Kronos Worldwide (KRO.N), Trinity Industries (TRN.N) and Molycorp (MCP.N).

"After hedge funds found out that there were problems, they immediately turned to the options market, buying puts. This is not a small deal. Professionals (traders) reacted by coming into the options market to short it," said Jon Najarian, co-founder of optionMonster.com.

Put options, generally considered bearish bets, give the holder the right to sell shares at a specific price by a certain date.

According to optionMonster.com, about 3.8 million options traded in the first hour of trading on Wednesday, with NYSE volume trading 150 percent of its normal volume.

Options activity on Knight Capital was more than three times the overall open interest of 10,969 contracts, with most action in put options, according to Interactive Brokers Group options analyst Caitlin Duffy.

Hours after the trading glitches, Knight Capital said that a "technology issue" in its market-making unit had affected the routing of shares of about 150 stocks to the NYSE where abnormal volatility roiled the markets in early trading.

Shares of Knight Capital plunged 23 percent to $7.96 after hitting a seven-year low of $7.62 a share earlier.

"Traders scrambled to get long downside puts as the stock spiraled lower this morning, with notable fresh interest building across all available expirations," Duffy said.

Front-month put volume was the heaviest with upwards of 7,000 lots changing hands at each of the August $7.50 and $10 strike prices.

Early birds snapping up more than 4,000 of the August $10 strike put this morning at an average premium of 68 cents saw the value of their contracts rise three-fold as premium on the contracts soared to a high of $2.50 prior to midday.

Trading traffic in the $7.50 strike puts set to expire in September, October and even January 2013 were also noteworthy as investors await further details and clarity on the morning's volatility, Duffy said.

Knight said in a statement that it had notified its market-making clients this morning to route NYSE-listed orders to other venues. The company said over-the-counter securities and trading in its other businesses were not affected.

(Reporting By Angela Moon; Editing by Kenneth Barry)

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