Friday, November 09, 2007

Sotheby's Sells Puts - Gets Hammered

Next to SW London real estate, and high-end US vacation property, art is clearly one the asset classes highly correlated to liquidity that one would love to short, but can't. Despite this difficulty for punters like me to "Go short art", Sotheby's managed the dubious pleasure of taking the other side of such a trade by selling half-a-billion USDs in puts on art...and getting carried out in the process.

For one of the prime reasons for their earnings torpedo yesterday was not only that buyers shied away from ringing the bell (again) amidst a wholesale banking credit crunch, but that to attract business, they guaranteed sale prices to insure they got the rights to "sell" the painting. But it's one thing to buy something as principal, speculating on the potentially unlimited upside, or with one's material non-public information, buy something with a seller in-hand. But giving away a put-option in exchange for the commission, to me sounds daftly like the epitome of bull-market foolishness. Sounds like some sharp hedgies found yet another sucker to pick-off when they weren't paying attention.

Of course its not the first time they've been hit. They have been famously known to extend margin loans, occasionally getting the put the collateral when the buyer can't make payment. While different from an outright put option for the commission opportunity, this is effectively selling a put for the interest spread margin. Hmmm, doesn't that sound like the Prime Brokerage business??

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