More Unusual Market
Activity Reported Before Attacks
By Laura Jacobs and Thomas Atkins

CHICAGO/FRANKFURT (Reuters) - Chicago traders on Wednesday cited unusual activity in airline options up to a month before attacks on U.S. landmarks, and German bankers reported brisk activity in reinsurer Munich Re shares, adding to speculation that those behind the attacks tried to profit from their acts.

The reports were the latest from U.S. and European traders that have triggered an investigation by financial regulators worried that the attacks may not only have killed thousands of people but those behind it profited from the carnage as well.

The U.S. has said the prime suspect in the attacks on the World Trade Center in New York and the Pentagon in Washington is wealthy, Saudi-born dissident Osama bin Laden, believed to be hiding in Afghanistan.

``We have received reports that those associated with the terrorist activities of last week may have sought to exploit our securities markets to profit from those activities,'' Stephen Cutler, the acting top enforcement officer at the U.S. Securities and Exchange Commission, said on Wednesday. ``We are vigorously pursuing all credible leads, but at this time, we have drawn no conclusions.''

In Chicago, a market maker on the Chicago Board Options Exchange said there was some unusual buying in both the September and October 30 puts of United Airlines parent UAL Corp. days and even a month before the attack.

``They bought them before (the attacks) and the month before, September 6 and August 6, the Oct and Sept 30 puts,'' he said.

A put option gives the buyer the right to sell the underlying stock at a specific price during the option's life.

Talk focused on stocks and options on UAL Corp and AMR Corp., the parent companies operating the two U.S. airline carriers whose jets were highjacked.

While some industry analysts have said that the spike in volume could have been based on fundamental and economic reasons, one industry official familiar with the investigations said: ``From what I'm hearing, it's more than coincidence.''


In Frankfurt, bankers also noticed unusual interest in stock-lending in shares of Munich Re, raising the possibility that at least one player may have prepared a short position with advance knowledge of an attack that would send the insurer's shares plummeting.

One banker, who requested anonymity, said he had received three price inquiries from major French banks about borrowing abnormally large stakes -- millions of shares -- in Munich Re. The requests were never followed up with an actual share loan.

``These inquiries were very big in size and they only asked about one share, and for that reason it stood out,'' he said.

Borrowing stocks allows investors to go short, selling the borrowed shares in the anticipation that their price will fall, after which the investors purchase the shares more cheaply on the market and return them to the borrower minus a fee.

``Shorting'' a stock, like buying a put option, is one way investors can make money in falling markets.

Buying a stock option at gives an investor the right to buy (using a call option) or sell (using a put option) the stock at a later date for a set price, known as the strike price. Because options can be purchased for a relatively small amount, as they are leveraged instruments, investors betting on a falling share price could in theory, make vast amounts of money if the share weakens sharply.

Before the attack, September and October 30 puts, which give an investor the right to sell 100 shares of UAL stock for $30 a share, were worth very little because UAL was trading above that price. But after the attack, UAL shares dropped below $20, making the options worth at least five times their pre-attack price.

Another German banker said price inquiries for millions of shares in Munich Re should have sounded the alarm that something very unusual was underway.

``If somebody would be looking for that many, it would be super-obvious. The share price would go through the floor. A normal request for Munich Re shares would be 50,000 or 100,000,'' said the banker, who also requested anonymity.

``Even at 500,000 we would be immediately looking into the company to see if there was something fundamental going on, a takeover or some news,'' he added.


Separately, options traders in Europe also reported unusual activity in Munich Re shares before the attack but said it was not dramatic enough to sound an alarm, adding that a shrewd actor would not likely have used the open market in full view of regulators.

Volatility in Munich Re shares increased sharply before the attack, jumping 30 percent from September 4 to September 7.

Open interest -- the number of contracts outstanding on the underlying stock -- in Munich Re also jumped by 3,500 lots on the Friday before the attack, compared to daily average volume of 2,400.

A spokesman for Eurex said the exchange, the world's largest derivatives exchange, had probed transactions in the days before and after the attack but found nothing to raise an alarm flag.

On Tuesday, Chicago traders said they had detected unusually brisk trading volume in some options of AMR Corp, the parent company American Airlines.

And in Amsterdam, Dutch traders said they had noticed unusually large volumes in options of the national airline KLM ahead of the attacks.


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