The September 11th attack
New data point to terrorism profiteers

USA Today

NEW YORK — Evidence continues to mount that unusual stock and option trading in the parents of American Airlines, United Airlines and other companies increased at an extraordinary pace in the days leading up to Sept.11.

Data from the New York Stock Exchange show that on Sept.10, short interest in United's parent UAL — a bet on a falling stock price — had jumped 40 percent from the Aug.10 level, to 4.4 million shares.

Phil Erlanger, who tracks short interest and options on www.erlangersqueezeplay.com, says such a level of short interest in UAL is unprecedented.

Compared with the 12-month average daily trading volume, UAL's short interest ratio reached 11.1 days. It was 7.8 in August. That means the number of shares sold short equaled more than 11 trading days of UAL's average volume. That ratio stood at 1.1 last year and has been building for 12 months.

"You haven't seen this kind of short ratio in years," says Erlanger.

Short interest in Dutch air carrier KLM also soared in the weeks leading up to Sept.11. In August, short interest stood at 135,761 shares. In September, the number hit 303,074 shares. Erlanger says KLM's short ratio spiked from three days to seven days leading up to the attack, higher than any prior shorting activity in KLM.

Last week, Securities and Exchange Commission Chairman Harvey Pitt said his agency was examining all unusual trading activity of stocks most severely affected by the Sept. 11 attacks.

The SEC is investigating whether people associated with the terrorists might have tried to profit from the catastrophe by engaging in risky trading strategies that would have paid big profits when airline and other stocks plunged.

Much attention has been paid to the high level of put options — bets on a falling stock price — in American Airlines' parent AMR. But Erlanger notes that some investors also were playing an extremely risky game of "naked call selling" just before Sept. 11.

Typically, when investors sell a call option, they are agreeing to sell stock that they already own at a set price on a future date. But in naked call selling, an investor pledges to sell stock that the individual doesn't own. If the stock price rises, the seller is on the hook not only for the price of the options, but for the stock, too. But if the stock falls in price, the profits can be huge.

"It's not the type of thing you'd normally do, unless you were sure the stock price was going to go down," says Erlanger. "There was nothing going on to warrant that kind of speculation.

"The footprint is there. You've just got to find which shoe fits it."