Options bet against Lehman

By Ambereen Choudhury  |   2008-6-5  |     NEWSPAPER EDITION

INVESTORS in the options and debt-derivatives markets are betting that Lehman Brothers Holdings Inc has further to fall amid concern the fourth-largest United States securities firm may need a capital injection.

Options traders increased their bearish positions to a two-month high on Tuesday, after analysts said Lehman may report its first quarterly loss since going public in 1994.

Credit-default swaps on the New York-based firm jumped 19 basis points to 275 yesterday, according to CMA Datavision prices. The contracts rise when investors' perceptions of credit quality decline.

Lehman, which dropped to an almost five-year low on the New York Stock Exchange on Tuesday, declined 6 percent in early New York trading to US$28.80. They are down 53 percent this year, the worst performance on the 11-company Amex Securities Broker/Dealer Index, Bloomberg News said.

Lehman may seek funds from overseas investors, including at least one in South Korea, the Wall Street Journal reported yesterday without citing sources. "Lehman may need to raise equity capital," said Bank of America Corp analyst Michael Hecht in a report to clients. He estimates the company will report a second-quarter loss of about 50 cents a share during the week of June 16.

Trading of Lehman put options rose to 283,676 contracts, or quadruple the 20-day average, and bearish bets on the company exceeded bullish ones by 1.6-to-1. The most-active contracts were June US$30 puts, which gained 68 percent to US$3.35. Trading in put options that give investors the right to sell the stock at US$17.50 by June 21 rose to almost 14,000 contracts on Tuesday.

"If there is a risk, and we do not think so, it is for shareholders and not bondholders," Andrea Crepaz, a Munich-based credit analyst at UniCredit, wrote in a note to investors yesterday.

Lehman shares fell on Tuesday, even after the company denied borrowing from the Federal Reserve and said the firm's cash holdings have increased to more than US$40 billion of liquid assets at the end of the quarter, up from US$34 billion three months earlier.