posted on Feb, 8 2013 @ 04:24 AM
One sentence version of my post: it's almost certainly just a little Armageddon insurance on a much bigger deal.
You might think 11 million is a lot of money, but most likely this sort of trade exists entirely as a 'just in case' thing to balance the risk on
something much larger, and they made that bet expecting to and PREFERRING to lose it all.
If you were making a deal worth hundreds of millions or even a multi-billion dollar deal, and you knew it was going to be the single most important
financial deal in your life, wouldn't you be comfortable throwing away 11 million dollars if it meant that you were going to save a lot of money in
the event total financial Armageddon happened just when your multi-billion dollar deal was going down?
Traders call events like that 'black swans' and there is actually a very small, elite club of investors who literally do nothing but lose money on
purpose for a living because they specialize in funds that exist entirely for this purpose. They lose money all the time because they specialize in
offering people a way to balance out the risk of these large, unforeseeable events happening at the worst possible time for them.
A good example of the sort of deal you'd want to use this sort of thing for is one where you are finally selling the company you have spent decades
building up and you are going to sell it for a massive windfall of hundreds of millions.
What if the market crashed on the day you were going to make say 400 million dollars from selling your company, everything you worked for for 30
years? Say you'd be all but wiped out and make only 1 or 2 million dollars while incurring debts of 50 million and you'd be bankrupt and isn't that a
So as part of the deal, you bet 11 million on a total market crash and you stand to win 333 million on that bet if the crash actually happens. So if
it doesn't happen, you make 389 million dollars, and if it does, you make 333 million instead of going bankrupt.
edit on 8-2-2013 by 11andrew34 because: