Bear Stearns options traders see more stock turmoil

By Doris Frankel

CHICAGO (Reuters) - Option traders on Friday braced for more turbulence in the shares of Bear Stearns Cos BSC.N after the investment bank was forced to turn to JPMorgan Chase (JPM.N) and the Federal Reserve for emergency financing.

Shares of Bear Stearns closed down 45.9 percent to $30.85 on the New York Stock Exchange.

The slide in the shares prompted options market makers to add several new series of put and call options at the start of the session.

Most notable were newly added calls and puts from the $22.50 strike all the way down to the $5 strike in the front month of March, which goes off the board next Thursday.

The clamor for Bear Stearns options pushed up its March at-the-money implied volatility -- the expected magnitude for its share price -- to around 335 percent on the close, after skyrocketing as high as 700 percent, according to Jon Najarian, a founder of Web information site optionmonster.com.

"These high levels are still reflecting extreme risk and continued expectations of violent price (share) movement," Najarian said. "

Options in Bear surged this week on liquidity concerns, and on Friday the volume was also heavy. In all, roughly 446,000 puts and 313,000 calls traded, nine times the normal level, according to option analytics firm Trade Alert.

"It's a troubling situation at Bear Stearns. Option traders took this bailout from the Fed and JPMorgan as a signal of the gravest order," said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.

So it is not surprising that market makers added new strikes below the $25 share price to protect against the ultimate crash in Bear's share price, she added.

Darst also noted the price of the March $35 straddle, an options strategy that entails buying both a call and a put with the same strike price and expiration, was about $13 a contract, more than one third the current share price.

That indicates that the market is bracing for a $13 swing in Bear's shares in the near term, she said.

Nervous traders were also looking at the March $20 put strike, allowing them to sell Bear shares at $20 apiece by next Thursday. And in the March $5 put strike more than 6,000 contracts moved at 20 cents.

With only four days left to trade this option, "people are anticipating a major negative announcement in Bear Stearns," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.

(Editing by Leslie Adler)