By James Cramer
Does anyone out there remember "married puts"?
For a brief period, from February until December 1990, those who used married puts coined money. Today a close cousin of that nasty investment device is wreaking havoc in the market, especially in the technology sector.
First a look at married puts, a gambit that couldn't fail back in 1990. We had a terrible bond market, runaway inflation, a slowing economy and a collapsing financial/real estate market that looked like Armageddon -- on a good day. Anybody who was short made a fortune. Back then short-sellers weren't content with waiting for plus ticks. (Those not familiar with the lingo of shorting should know that years ago, after the '29 Crash, the government outlawed bear raids, where individuals could gang up on stocks and sell them down without owning them. The mechanism they used to halt the raids was simple: You couldn't sell a stock short unless someone was willing to pay up for it. That eliminated the ability to cause a panic on the downside by simply offering short stock lower after you sold it.)
The shorts in 1990 decided to circumvent the rules by buying stock and simultaneously buying puts on the stock. Then they would recklessly blow out the stocks -- the ammo, we called it -- and get everybody all nervous and panicky. The upshot: Other sellers, fearing lower prices, would materialize, and the stocks would drop like stones. Then the short-sellers would sell the puts at a much higher price than they bought them, deduct the loss on the common -- which was invariably very small -- and go home crowing.
(To simplify: You want to knock down
. The stock is at $55. You buy 100,000 shares of stock and simultaneously buy 1,000 May 60 puts at $5. Then you recklessly sell the 100,000 shares down, say to $53, causing everyone to think that something is wrong at Western Digital -- not hard because it is tech and the lies being told about tech right now are legion. You probably help the slide along by telling the trader handling the order "Don't be long Western Digital," Street shorthand for bad news coming; better dump. That transaction leaves you long only the put, which went up in value as the stock went down. Now, psychology being what it is, other sellers force WDC down to $50, where you sell the puts. You lost two bucks on the stock but made five bucks on the puts, for a tidy profit of $300,000. I am not kidding, this is really what happens. I have seen it with my own eyes.)
These married put programs wrought havoc on the markets and helped bring about the collapse of hundreds of stocks, some for no good reason other than they were easy to knock over.
After a while the respectable firms that initially condoned this activity, subtly outlawed "Buy Stock, Buy Put," as it was also known, recognizing that they were abetting a crime -- a willful, synthetic way to get around the securities laws that were meant to keep orderly markets.
Well, I've got bad news for everybody, particularly the good guys who believe in fair markets: The "married put" crowd is back in a new guise. They are shorting stocks and then going out to whack whole indices to create fear and panic. No fuss, no mess and no upticks. And they are doing it chiefly in technology stocks. They are one of the main reasons why tech continues to trade so badly.
I have been hearing about these shenanigans for months now, but now I see it daily. Take Monday. Tech looked like it was going to rally from the opening bell. Why not? The
price cuts weren't bad. The drive companies gave bullish presentations at
. Some computer survey showed a lot of people using computers -- duh. But a few minutes into the trading day short-sellers came out in force on a whole bunch of tech names.
Soon after the shorts were put on, the short-sellers went to work banging down the
Morgan Stanley Technology Index
, chiefly by selling in-the-money calls, something that does not require upticks. All of the stocks that had just been shorted went into freefall, as the call selling got transferred into actual selling of stocks.
It was impossible to tell that derivative trading was behind the reversal unless you were closely monitoring the index and the option activity in it, as I was. But it was plain as day that the tail, the index itself, was wagging the dog, which included virtually every big-name tech stock. In a few minutes my screen went from green to red, as the MSH sell program reverberated through the markets. It kept on like that for much of the morning, until real buyers came in to stem the dislocations. Some of us just went in to stand up to the manipulation, which, by the way, we all know about and are all getting sick of, and tech got some lift.
No such buyers came in on late Friday, when MSH sell program on top of MSH sell program brought tech down every time it tried to lift. That's why tech finished so ugly, even though I could find very few real sellers. Last Friday these clowns had the audacity to slam a bunch of these short-selling programs on at 3:55 p.m. just to shoot the prisoners and complete the rout.
How long will this corrupt game last? How long will short-sellers with just a little bit of capital knock down great companies with just a flick of the MSH wrist?
It took about a 25% decline in the
to stop the manipulation in 1990. Down 700 points, the brokerage firms came to their senses and realized that they shouldn't abet manipulation that made a few bucks for the derivative side but gutted their basic client business.
Now the derivative biz is even more powerful. Let's hope the forces of good within these firms come to their senses and put an end to these bogus "sell programs" before they accomplish what they failed to finish in 1990. In the meantime, don't expect tech stocks, particularly, those in the MSH index, to trade on fundamentals any time soon¿
Random musings. Several readers have inquired about the name of the reporter who got the tobacco story wrong on
last Friday. I have to tell them that one of the traits in journalism is to protect your own: If this mistake had appeared in
, I would have put the guy's name in my Wrong! column and left it up for everybody to see. But
Pick: The incredibly insightful interview with William O'Neil in this morning's
. Wow, no equivocating there. He tells it like it is. What a pleasure. No wonder I like
The rhythm of the day: Won't it be a pleasure when the Mark Haines to Bill Griffeth team is back. The day just doesn't go smoothly without
Looks like I don't have to program my set for WBIS Channel 31 after all¿
James Cramer is manager of a hedge fund and co-chairman of
His fund is long
. While he cannot provide investment advice or recommendations, he welcomes your feedback, emailed to