Tuesday, September 29, 2009

CIT Group (CIT) - Gambler shows his hand

Happening right now: As I sit here on the exchange floor, I am keeping a close eye on the 1 strike puts in other months; the exchange floor rumor mill is rife with whispers of more put selling on that line.

CIT Group Inc. is up on rumor that Hedge fund manager John Paulson is considering a potential merger with defunct IndyMac Federal Bank. Apparently the market sees the combination of troubled home loans (IndyMac) and troubled small business commercial loans (CIT) as a good fit. A look at the options markets shows that someone may have had a good idea of what was to come and what the reaction would be.

Peaking at the LevelII quotes from LVP we see:

The Nov 1 puts in CIT had an open interest (OI) of 921 contracts as of the open on Friday 9/25/2009.

On Monday 9/28/2009 the OI spiked to 102,258 (trades occurred Friday); implying someone opened up a 100k contract position. Looking at the Time&Sales Tab on LVP I can see the order(s) was a sale smacking the bid on NYSE ARCA at a dime.

On Tuesday 9/29/2009 the OI jumped yet again to 200,861 (trades occurred Monday); implying another opening 100k contract position (also a sale), this time on AMEX.

Net the position collected $2,000,000 in premium with the risk of getting long 20 million shares for $1.00

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