Knight Capital Woes Show Up Even More In Put Options Trading

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The woes for Knight Capital Group, Inc. (NYSE: KCG) are still there despite newswire headlines about ongoing talks with multiple parties which have been seen throughout this Thursday.  As of 12:45 PM EST we had seen that the trading volume was over 100,000,000 shares.  The price drop was almost 55% to $3.13 as the company’s $440 million loss confession compared to a pre-confession market cap of $622 million.  That loss is also before the impact of class action suits, which you know are coming down the pipe.

Perhaps the most interesting trading action is in the put and call options. The August 12, 2012 expiration date $2.50 PUT options have traded over 40,000 contracts as of now.  At $3.13, this is a bet that things are going to get worse for Knight Capital.  Perhaps far worse, and at this point it is only prudent to consider that Knight Capital’s future is very much at risk.

We hate to use the term bankruptcy before any filings because it can be catastrophic to shareholders, trading partners, and clients.  That being said, there is no assurance that Knight can survive this fiasco.  The good news is that the trading in those $2.50 PUTS does not signal an automatic pricing-in of a bankruptcy.  With the contract’s last offer at $0.55, that implies a $1.95 breakeven price in the stock on an intrinsic value basis.

Those same $2.50 PUT strike prices for the month of September are trading at $0.70 on last look.

JON C. OGG