What Options are Saying about Lehman

What are the options trades in Lehman Bros. stock saying about the investment bank's future?

"The question, I think, on everyone's lips is whether we're seeing a Bear Stearns-like setup in Lehman Brothers," said Rebecca Darst of Interactive Brokers on CNBC's "Squawk Box." "And so we're going to ask ourselves, 'Is implied volatility in Lehman very high?' Yes, it is, even after yesterday's relative upside for Lehman shares, the options market is looking for 75 percent more price risk to Lehman shares over the next 30 days ...  The preponderance of put trading in Lehman Brothers suggests that this risk lies to the downside..."

Puts are options that give the buyer the right to sell a stock at a certain price at a specific date in the future. Traders often buy them in hopes of using them to sell stock at above market prices at a later date.

Darst rebuffed speculation that options traders were betting on the ultimate demise of Lehman , and by doing so actually moving the market toward that end. Some argue that phenomenon helped seal Bear Stearn's fate. (See Darst's full comments in the accompanying video).

"As to the question of whether option traders have it out for Lehman in a way that some would argue they had it out for Bear Stearns, I would say, 'Not really,' because I think that a lot of the volume at these out-of-the-money, front-month put strikes is being sold as well as bought, and that was, that contrasts sharply with the setup we saw in Bear Stearns," she said.

The current options action suggests more of a straight out bet on Lehman's upcoming earnings report, she intimated.

"I think there's a paradigm shift, at least in terms of the brokerages, where it's not necessarily quite so unpatriotic to position in puts in a brokerage as it might have been a couple of months ago. I tend to agree with people in the market who would suggest that it's fair to suggest that Lehman Brothers shares may be trading at a lower value in three to six weeks from now than they are today, and you're not necessarily conspiring for the demise of the company, in doing so."

Lehman stock has fallen sharply on speculation it faces the same financial problems that brought down Bear Stearns. Yesterday Lehman slashed its risky debt holdings by as much as 25% and raised $8 billion in capital this year to shore up its balance sheet, according to an internal memo obtained by CNBC.

Lehman stock got a boost after Merrill Lynch upgraded its shares to a "buy" from "underperform" and Lazard's CEO Bruce Wasserstein praised Lehman, saying "(CEO) Dick Fuld is very able."

People with knowledge of Lehman's activity say that firm's officials have met with potential buyers of the securities in recent weeks including BlackRock , which has purchased risky assets on the cheap from other firms like UBS in the hopes of selling the securities for profit at a later date.

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