Bear Plays Abound on Financial Stocks

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The financials are in trouble. Doubters can simply look to the options market, where

Merrill Lynch

(MER)

,

J.P. Morgan

(JPM) - Get Report

and

Travelers

(TRV) - Get Report

puts have become as hunted as

Beanie Babies

on Christmas Eve.

The major financial firms have been hammered and investors as expecting things to get worse before they get better, or at least before September expiration. Put action today put Merrill Lynch right below

Dell

(DELL) - Get Report

on the

American Stock Exchange

volume rolls. With Mother Merrill's stock sagging 7 1/4 to 52, more than 3,000 each of its September 60 and 70 puts changed hands. With the stock falling, the prices of those in-the-money puts rallied as well, with the 60 climbing 5 ($500) to 8 1/8 ($812.50).

Philadelphia Stock Exchange

trading in J.P. Morgan and Travelers options has created havoc in the puts, sending some traders into new careers during the past week, according to both floor traders and some upstairs options pros. Today the puts kept bouncing. Last week, the Travelers options specialist

Park Avenue Securities

ran into enough financial trouble keeping up with trading that the book was transferred to giant

Spear Leeds & Kellogg

.

Traders targeted J.P. Morgan -- down 3 to 84 1/8 today -- for continued troubles, pessimism that helped volume on the September 85 and September 90 puts to the 700-contract range. The price of the September 85 contract rose 1 1/4 ($125) to 4 ($400) on the action. Meantime Travelers -- the house that

Sandy Weill

built -- saw 649 of its out-of-the-money September 85 puts trade today.

But at least one hardened options pro thinks the time has passed for what he called "unbridled put buying" on the financial stocks. Tom Dorsey, of

Dorsey Wright

, said the sector has gone "coast-to-coast" in the technical indicators he uses to track stocks. The sector's bullish reading was 70% in April and May, when Dorsey said he went to a defensive position, and it now stands at 14% for financial companies and 20% for Wall Street firms. "If someone wanted to jump the gun now, I'd say they shouldn't buy calls. It's too expensive. Premiums rise when the market falls," he said. "They should buy the common and sell a call."

Traders have special concerns regarding Travelers. Many are wondering if the company's proposed merger with

Citibank

(CCI) - Get Report

is in trouble because both sides of the deal have incurred losses in the Russian market. The spread on the deal has widened enough to spark some concern that the ratio may eventually have to be adjusted.