The class-action lawsuit against JP Morgan alleging silver price manipulation has exposed several shocking revelations regarding JP Morgan's alleged price suppression of silver- including the PURPOSE of major smash-downs occurring in the hours leading up to options expiration.
The suit alleges that JPM orchestrated monthly options-expiry smash downs with the express intent of blowing up the "delta" risk of holders of short, far-out-of-the money options, suddenly forcing them to cover their positions, thus handing JPM silver futures positions at prices far below market prices only minutes prior.
The suit also alleges that JPM made over 25 massive FAKE TRADES using Saxo Bank during sparse Globex evening hours prior to major silver raids for the express purpose of TELEGRAPHING AN IMPENDING SILVER SMASH TO THEIR BUDDIES!
8. Saxo combination
More than twenty five additional instances of this manipulative selling occurred appeared following the highly unusual appearance of a fake trade on the Saxo Bank Silver and FOREX trading platform. JP Morgan and Deutsche Bank assisted Saxo in providing this trade platform. However, this Saxo trade platform repeatedly published a fake trade through March 2010 that did not appear on the trade platform e-signal.
9. It was highly unusual for Saxo Bank to let a fake trade repeatedly appear on the Saxo Bank platform.
10. In fact, the fake trade consistently appeared at the same time of day. This was between 5:45 pm and 6:00 pm when there was a lull in trading.
11. Moreover, the price of the fake trade was far removed from the immediate remainder of the other trades.
Third, every fake trade involved a violent down drop that appeared on the chart and immediately returned.
12. The individual and cumulative effect of the more than twenty five plus COMEX price drops that occurred after the Saxo signal, was to cause COMEX prices to be lower than they otherwise would have been.
44. The effect of price movements on options positions is accentuated by the use of the Black-Sholes type model to value options. The Black-Sholes options pricing model is a formula that created a "delta", which estimates the equivalent futures position for an options portfolio. An option that is well in the money close to expiration will have a delta of approximately 1 for a call or negative 1 for a put, meaning that owning the option is the equivalent of being long 1 futures contract for the call or short 1 futures contract for the put. Likewise, an option that is far out of the money close to expiration will have a delta of approximately 0, because it is unlikely that the option move to an in-the-money position.
45. As an option nears a point of being in the money, the delta of the option approaches 0.5. Many options traders use the measure of the delta expressed in Black-Sholes type models to hedge their delta exposure. This means that if they hold many options, even if the delta is substantially less than 1 (and the option is out of the money), they may need to sell or buy futures to hedge their delta exposure. So, for example, if a trader is short 100 out-of-the-money puts whose delta is 0.25, in order to be "delta neutral", the trader must sell 25 futures contracts.
46. For the periods alleged below, JP Morgan purchased put options with strike prices that, prior to expiration, were far below the price of the underlying silver contracts. These "far out of the money" options were nearly always purchased from traders that used some variation of the Black-Sholes trading model.
JPM was fully aware that a trader using any Black-Sholes type trading model would hedge their short option positions based largely upon the options delta i.e the risk (represented on a scale of 0 to 1) that the option would be exercised.
JPM also knew that options trading at prices far out of the money, particularly those that were set to expire shortly, would be assigned a delta near 0 and left largely unhedged by the traders who sold them.
JPM was also aware that any sudden and unexpected decline in futures prices would cause option deltas to skyrocket, perhaps as high as 1, and send the sellers of the far-outside-of-the-money puts scrambling to sell futures in order to hedge their newfound option risk. In such a selling frenzy, JPM would be able to purchase silver futures at prices far below what they had been trading hours, if not minutes, earlier. In addition, the decline in future prices would allow JPM to profitably exercise options that shortly before seemed certain to expire worthless.
47. As discussed more fully below, on several occasions, including on June 26th 2007, and August 15th 2008, JPM intentionally manipulated the price of silver futures contracts at or near the time of expiration for the express purpose of forcing the holders of short, out of the money options to cover their positions.