Bears Prowling for Lehman

It’s deja vu all over again as again the bears are all over the scent of Lehman Brothers’ blood. Back in March, just after Bear Stearns was gutted, it was Lehman Brothers who saw the deadly volatility spike on their puts:

Down in the pits fear morphs into greed as the same ominous options activity is taking place now on Lehman’s put contracts:

Options traders are making big bets that Lehman stock will drop an additional 24% by Thursday, when March options expire, Dow Jones Newswires reported. Traders also are betting that the shares will continue to plummet over the next month.

Lehman is caught in the same frenzy of credit capture and denial as Bear Stearns was in last week…

And it looked as if PUT buyers were in the know as on Friday March 14 Lehman Brothers closed at 39.26, then opened Monday March 17 at 25.38. And just as soon as Lehman’s shareholders felt their heart pounding with the thud of that $14 plunge like a parachute that didn’t open, the bank rigged its earnings, turning a cliff dive into a roller coaster:

Lehman dazzled last week with earnings that beat the street: dropping by more than half. The firm only wrote off an additional $1.8 billion (miniscule compared to some of the write-down and exposure estimates from our previous coverage, below). Now, don’t all run out and buy Lehman shares too fast. Of course, the street did, and shares surged by 46% the day of the announcement.

It was all well and good so long as you paid no attention to the man behind the curtain. But bears, especially hungry ones see everything:

David Einhorn, the manager of a hedge fund that holds a short position on Lehman, said he suspects the bank’s most recent quarterly data were inflated with one-time, unrealized gains, The Wall Street Journal reported Friday.

And so here we go, it’s deja vu all over again:

There’s been a sharp increase in implied volatility in the options market, suggesting that investors are concerned that this weakness will beget more of the same down the road. Thursday, put option volume outnumbered call option volume by three-to-one, and activity is notably weighed towards pessimism on Friday as well.

The world-wide Ponzi scheme is coming apart at the seams. Lehman Brothers was walking the Green Mile in March only to have that mile lengthened, but they are still a dead man walking nonetheless. We have yet to see how much farther it has to go, but it will certainly end.