Lehman's Options Plays Suggest Fear

Shares of Lehman have dipped since that put-buying frenzy, sinking to a low of 19.25 on Monday. Rumors spread that the company was up for sale or on the brink of insolvency. Yet the stock refused to break any further and is now trading near the $23 level.

But that breach of $20 level set off a smaller wave of put buying, which pushed implied volatility near the 200% level. While the time decay since the June 11 amassing of puts has basically cut the value of those contracts in half, traders still believe the firm is in dire straights and will fail to remain independent. And any potential buyout might come below current share-price levels, as was the case with Bear Stearns.

At the current pricing structure, the options market is now placing a 50% chance that shares of Lehman can move $10 with the 16 days remaining until expiration. And while we have seen that anything can happen and things can unwind quickly, the clock is ticking. And while Lehman might not meet the criteria of being "too big to fail," Wednesday's statement from Treasury Secretary Henry Paulson made it clear they are adopting a policy to prop up banks to keep the financial system from having a systemic break down.

It's worth noting that Lehman still has $27 a share in tangible book value. And some assets, such as the Neuberger Berman asset arm, remain quite healthy and capable of being monetized. "It could be fruitful for Lehman to pursue partial sale of certain assets, retaining some upside," notes Merrill Lynch's Guy Moszkowski.