August 1, 2014 / 6:45 PM / 4 years ago

UPDATE 3-Massive, unusual options volume Friday confounds Wall St

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By David Gaffen, Angela Moon and Ryan Vlastelica

Aug 1 (Reuters) - A barrage of bearish options contracts costing an estimated $8 million and set to expire worthless in a few hours were purchased across multiple stocks Friday afternoon in a move that traders said made no sense.

Shortly after 1 p.m. EDT (1700 GMT), more than 700,000 put options contracts were traded across a number of different stocks in 1,300 trade orders. Names traded included Priceline , Chipotle Mexican Grill and others, and the bulk of the contracts expired at the end of Friday’s trading, according to Henry Schwartz, president of Trade Alert LLC.

The identities of the buyer or seller of these contracts were not immediately clear. However, representatives at several options exchanges said that trading appeared to be normal, which suggests that the trades could stand.

“It looks like a fat finger, which you wouldn’t expect to be an easy thing to happen, but with today’s automation, who knows?” said Andrew Wallin, vice president of sales and trading at Lightspeed Trading in Chicago.

“It all went off right in a minute. It was so fast, all happening in a few seconds, 1,300 orders, all in a minute for options expiring in three hours, all on the put side,” he said.

A spokesman for the New York Stock Exchange, which runs two options exchanges, said that the firm does not have any erroneous trades on either its NYSE Arca or NYSE Amex exchanges, and therefore do not have any trades to adjust or cancel.

Representatives for the Chicago Board Options Exchange, which accounts for more than 20 percent of the usual options volume, and Nasdaq OMX, which runs three options exchanges, said trading appeared normal and that no glitches were seen.

The activity involves thousands of bearish put contracts in companies including Regeneron Pharmaceutical and Expedia Inc. Regeneron and Chipotle, for instance, have seen about 27 times the usual daily options volume as a result of the trades.

Schwartz, in a note, said it is unclear if any trades will “qualify as obvious errors that may be bustable.”

Investors buy put options in bets that a stock’s price will go down, but these bets would require a sharp drop in a matter of hours on a relatively quiet day in the stock market to become profitable. The peculiar nature of the trades led many to believe that it was caused by a mistake in recognizing when a particular contract was set to expire.

Evan McDaniel, manager at IV Trading Group in Chicago, said the error was likely the result of execution. He said the buyer may have bought the wrong options contracts due to the oddity of an expiration occurring on the first of the month.

In Chipotle Mexican Grill, for instance, 21 different contracts at strike prices between $582.50 and $632.50 saw more than 11,000 contracts trade. With open interest scant in most of those strikes, that means these are new positions, and would mean Chipotle’s shares would have to collapse by anywhere from 6 percent to about 15 percent in a couple of hours. The stock ended up 0.4 percent to $675.14 a share.

“It appears someone may have made a mistake pressing a button because there’s no logical sense for these types of trades,” said J.J. Kinahan, chief derivatives strategist for TD Ameritrade. “No one can really figure out why they happened; the trades make zero sense.” (Reporting by David Gaffen, Angela Moon and Ryan Vlastelica; Additional reporting by Jennifer Ablan; Editing by James Dalgleish)

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