Stock manipulation in The Taking of Pelham 123

Question

I don't understand the "put options" (as I have read in Wikipedia) manipulation of stock prices in the movie The Taking of Pelham 123 (2009). Can anyone explain this in a simple way?

Answer 1

When big, bad things happen, financial markets react in predictable ways. Typically, stocks drop globally and U.S. treasury debt spikes, as do precious metals and the U.S. dollar. This is because people react to uncertainty by selling other assets and buying something that feels safe, and nothing feels safer than a U.S. Treasury note or a lump of gold.

The antagonists in The Taking of Pelham 123 had purchased derivative contracts that would allow them to benefit in a leveraged way when stock markets dropped on news of their terrorism. In practice this could be done by shorting futures or buying puts on stock futures, or several other ways. Puts give you the right to sell an asset at a specified price, and they increase in value as the price of that asset drops. So if a future is currently trading at $100 and you pay $1 for the right to sell it for at least $95, then the future drops to $90, you can buy futures for $90, sell them for $95, and pocket a profit of at least $4 from each $1 you spent on puts. (In practice you might do better, depending on how quickly the futures dropped after you bought the puts).

The bigger the drop and the more quickly it happens after the puts were purchased, the more money the bad guys would make.

This scheme is generally plausible; a group of young professionals were caught setting off bombs in Argentina(?) about 25 years ago, with exactly this sort of manipulation in mind.