I take issue with that, the article alluded to the reason but never mentioned it: why did the put option fail to hedge the forward?
That really does sound like a big freaking problem!
What the hell happened!? Volatility went through the roof that option should have been a gold mine! What was the underlying asset for the put option, the shares or another forward that would pay out the difference??
If shares, did the short selling restrictions the SEC put in place adversely affect the viability of that option? Was the SEC colluding with Goldman to wipe out Libya's bet? Even unwittingly?
If not shares, did something happen to OTC options in the forward market that is not common news??
This lawsuit could have many legs. Not in compensation but information, and if the bank doesnt want that information out there then compensation.
> why did the put option fail to hedge the forward?
They essentially bought a call option. Remember, (bought forward + put option) = call option [1]
They weren't 'hedging' anything, they just wanted to gamble that the stocks would go up. Obviously, that didn't happen. Because all they bought were options, they lost a lot less money than if they had simply bought the same notional amount in actual bank stock.
> Volatility went through the roof that option should have been a gold mine!
Options increase in value when volatility increases only if the stock price doesn't change. If you hold a call and the underlier tanks, it generally doesn't matter than the volatility shot up (unless the option is super long-dated). Try it yourself: http://www.option-price.com/
Everything I've read suggests the trade was very directional. They wanted to make money when citi went up. Maybe they had some puts, or not enough, but the story's two years old now and I haven't heard anyone suggest that LIA had a bunch of 'dud' puts.
That really does sound like a big freaking problem!
What the hell happened!? Volatility went through the roof that option should have been a gold mine! What was the underlying asset for the put option, the shares or another forward that would pay out the difference??
If shares, did the short selling restrictions the SEC put in place adversely affect the viability of that option? Was the SEC colluding with Goldman to wipe out Libya's bet? Even unwittingly?
If not shares, did something happen to OTC options in the forward market that is not common news??
This lawsuit could have many legs. Not in compensation but information, and if the bank doesnt want that information out there then compensation.