Why would you buy puts for your arch-enemy right before a market crash?


If you're watching superhero movies for financial advice, you're probably in trouble. If you're watching The Dark Knight Rises for financial advice, you're probably in worse trouble. Especially if you're looking for ways to sabotage your enemy's finances, like Batman's nemesis Bane.

So, for all the would-be super-villains out there, let me strongly recommend that you skip the final act of Christopher Nolan's Dark Knight trilogy. Instead, let's take a moment and talk about why Bane's financial subterfuge is so unnecessarily risky -- if only as a reference for everyone out there with designs on taking over the world. (Disclaimer: If you haven't seen The Dark Knight Rises and don't like spoilers -- and really, who likes spoilers? -- you should stop reading. You have been warned).

You might think that a terrorist able to hold an entire metropolis hostage for half a year would be a stickler for details. You would be wrong. Time and again, Bane leaves things to chance. First, there's the small matter of not killing Batman when given the opportunity -- to draw out his suffering, of course. That's just a de rigueur super-villain mistake. But Bane's hit on the Gotham stock exchange is less understandable. Remember, the point was to leave Bruce Wayne destitute so he'd have to turn to a financial white knight -- who would turn out to not be such a white knight -- to keep Wayne Enterprises and its fusion reactor out of the hands of Bane's corporate benefactor.

So far, so good. 

But how does Bane impoverish Batman? Step one involves hijacking the entire Gotham stock exchange. Step two is breaking into Wayne's personal account directly from the exchange. Step three has something to do with buying lots of puts that expire at midnight on futures. And the fourth step is, of course, profit. Well, not for Bruce Wayne.

Let's count the way this doesn't make sense. As my colleague Jordan Weissmann and I discussed, none of the above steps come close to anything resembling verisimilitude. Trading would almost certainly stop once the attack on the stock exchange started. And if trades did go through, they would probably be canceled afterward. Nor would Bane need to hook into the exchange to trade under Wayne's name.

But the biggest question is why in God's name would Bane buy puts for Wayne? A quick refresher: Puts are contracts that protect the buyer against losses. They entitle the buyer to sell something at a certain price -- the strike price -- by a certain date. For example, say a stock is at 100 and you buy puts on that stock with a strike price of 90 for the next six months. If the price drops below 90 any time over that period, you can still sell it for 90. So why would Bane buy options that protect Wayne against losses when Bane's assault would almost certainly cause huge losses? Presumably because Bane used Wayne's money to buy waaaaaaaaay out-of-the-money puts. In other words, the strike price was very, very low -- something like 70 in our above example. Markets would have to completely collapse for the the puts to pay off. 

But what if they did? Investors would panic big time after a strike on the stock exchange itself. If the panic was big enough, Bruce Wayne's billions would seem like a relative pittance compared to his new riches. Puts that far out of the money are quite cheap -- so even a modest payout on a single contract would be multiplied many, many times over. Of course, this assumes that the exchange would extend the expiration on the puts for as long as markets were closed. But that's a safer assumption than anything Bane figured.

There's a much easier way to do this. Bane could have just used Wayne's money to buy calls. They're the opposite of puts. They entitle the buyer to buy something at a certain price -- the strike price -- by a certain date. In plain English, they're a bet that prices will go up. Given that Bane's attack would send stocks swooning, there's no chance the calls would have paid off.

Oh, and one last pro tip. Never assume you've broken Batman.