CHICAGO/NEW YORK, April 16 (Reuters) – Option investors jumped on the plunge in Goldman Sachs Group Inc <GS.N> shares on Friday, with many taking bearish bets after the investment bank was charged with fraud.

Goldman shares lost as much as 15.6 percent after the U.S. Securities and Exchange Commission charged the company with fraud in structuring and marketing of debt products tied to subprime mortgages. For details, see [ID:nN16121493].

Action was heavy on a day when April option contracts expire after the close, and more investors appeared to take a bearish view on Goldman. In afternoon trading on the New York Stock Exchange, its shares were down 11.9 percent at $162.28.

“Option investors are taking advantage of Goldman’s pain today,” said Interactive Brokers Group equity options analyst Caitlin Duffy. “Excluding the frenzied trading in the April contracts, some are looking to profit by employing bearish trading strategies. Many pessimistic investors bought out-of-the-money puts.”

The lawsuit is a significant challenge for Goldman, which emerged from the global financial crisis as Wall Street’s most influential bank, and investors worried that the news could serve as a cloud over the industry.

“If I’m an investor, why would I want to be in the financials?” said Chris Wang, portfolio manager at hedge fund SYW Capital Management LLC in New York, who bought put options in Goldman Sachs on Friday.

Option volume in Goldman was explosive as traders exchanged more than 600,000 contracts, eight times the average daily volume by late afternoon, according to option analytics firm Trade Alert.

The best performing stocks of the last decade all started as penny stocks, and they combine two things Americans generally consume in great measure: worry and food.

In the “aughties,” as the decade has been called, the top three performers in the Russell 3000 among those that were in the index at the beginning of the decade were Medifast, Green Mountain Coffee Roasters, and Hansen Natural. They were up, respectively, more than 16,000 percent, 9,000 percent, and 7,000 percent.

A big part of what drives investor psyche are tangible numbers – sales, revenues, profit margins. But worry is another powerful motivating factor, and it showed in the last decade. Two of the biggest worries many Americans have, both on a personal level and societal level, were the environment, as well as the growing scourge of obesity in the U.S.

All three are food companies, and all three companies traffic in products that countermand what seem to be inexorable trends – environmental decay and waistline expansion. Medifast is a provider of “meal plans” for people looking to lose weight. Green Mountain sells coffee wholesale, offsets 100 percent of its own greenhouse gases, and donates at least five percent of its pre-tax profits to “social and environmental projects.” Hansen’s sodas are free of preservatives and artificial flavors.

All three companies piggyback the consumer spending binge of the last decade as well – and it didn’t hurt that they had tiny stock prices at the end of 1999, as all three traded for less than $1 a share.

In a bull market, buying on the dips works like a charm. Pullbacks in the market are quickly cannibalized by hungry investors looking for anything that smells like a bargain.

In a bear market, dip-buying does not work so well, as supposed bargains turn out to be value traps. This brings us to Ken Lewis, retiring as CEO of Bank of America. If dip-buying is a disaster in bear markets, Lewis engineered the M&A version of “dip buying” at the worst time not once, but twice.

He struck first with a $2 billion investment in Countrywide Financial in August of 2007, just before stock markets peaked – and after real estate was already teetering. In a good environment, it’s a potentially solid investment. Not so much this one, when Countrywide was at $18 a share, and Lewis doubled down with a $4 billion buy (well, rescue) of Countrywide in January of 2008. That’s hit the bank hard due to rising defaults in the housing market, which some analysts believe have not peaked.

But the real blow came on that fateful mid-September weekend when Lewis spurned Richard Fuld of Lehman Brothers and instead agreed to purchase Merrill Lynch for $ 29 a share, a 70 percent premium to where it was trading at the time. This has been more than problematic; the brokerage accelerated $3 billion in bonus payments in advance of a shareholder vote on the deal, in the midst of a quarter in which it lost billions. Lewis said he had second thoughts about the deal, testifying before Congress that then-Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke pushed him to go through with the purchase.

The damage had been done, particularly to the stock price. Eventually, the company may recover, though the housing market’s drag will weigh for a long time, as consumer behavior has been altered dramatically. Whatever happens, it wasn’t enough to save Lewis.

The stock market’s penchant for emotional reactions that remind one of a roomful of two-year olds can never be underestimated. Major world central banks are pulling back on their efforts to provide liquidity to the financial system, and the U.S. equity market has flipped out, with stocks falling sharply after the news.Volatility has spiked as well, even though the banks’ move is largely administrative, with demand for certain borrowing programs already diminished. Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ notes that “demand for dollar liquidity at banks offshore is sharply reduced now that the crisis has blown through. The amount of dollar borrowing in offshore centers is down sharply.”

But equity markets aren’t so easily swayed by reason. The move in stocks follows a similar sell-off late Wednesday, after the Federal Reserve’s statement, which intimated that it would start to reduce the tools that it has employed in keeping things afloat. Joe Saluzzi of Themis Trading pegged the reaction as a predictable one from the notoriously self-interested stock market, saying that “now all the money printing crack addicts who are waiting for more of it are not getting their money printing and they are going to throw a hissy fit.”

And this is with only the most gradual of responses from the Fed. Lou Crandall of Wrightson ICAP points out that the Fed, with the tweak to their statement Wednesday and today’s action, is signaling its intention to shift away from life-support efforts, even though it is nowhere near raising interest rates.

The uneasiness becomes clearer when considering the day’s poor housing figures. Sales of existing homes fell 2.7 percent in August, and some speculate that the eventual removal of a first-time home-buyers credit by November (only homes that have closed qualify) will cause a reduction in demand, similar to the way the cash-for-clunkers program provided a temporary lift in auto sales.

No one data point can be taken as a full assessment of the economic environment, but major sectors of the economy are running with training wheels. What happens when they’re finally removed?

The old lore about the best way to cure a hangover is with a few more nips of whatever it was you were imbibing the previous evening, commonly known as “hair of the dog.”

The extension of this rally in stocks and just about every other asset identified with risk feels like a hair-of-the-dog situation. Between 2003 and mid-2008, easy flow of capital facilitated revelry in stocks, emerging markets, real estate, bonds, and high-yielding currencies.

When investors invariably lost interest in an asset class where valuations could no longer be denied, they flocked to another – witness $150-a-barrel oil, $1,000 gold prices, and crazy gyrations in wheat and soybeans, of all things.

Then the hangover came. Major stock indexes were cut in half. Oil went to $30 a barrel, and investors fled for cover in the dollar and the safety of Treasury bonds.

With U.S. Federal Reserve and other central banks cutting rates to nothing, money worked its way back into the markets, though.

And how: Bespoke Investment Group notes that the S&P’s charge has lifted it to its highest level above its 200-day moving average since 1983, just six months after it hit its lowest point below that average since 1932 – something that’s only happened three times. The Australian dollar is up 23 percent against the dollar this year.

Want more? China’s SSE Composite has gained nearly 70% since hitting a low late last year. Options action has been massive in recent days as investors concentrate bets on momentum-oriented names. The party line on Wall Street is that markets are reconsidering their view of risk, but recent reports noting investment bankers’ newfound interest in securitization of life insurance settlements (surely nothing can go wrong there).

So who is right and who is wrong?The stock market has rallied by more than 50 percent in the last five months. But bond market yields currently hover around 3.4%, and while that’s nowhere near close to the crisis-induced record low reached at the end of 2008, a graph of the 10-year note’s yield shows that it remains lower than almost any point other than when prices spiked in the wake of the Lehman Brothers collapse.

Equity investors would rightly point to better housing data and stronger economic indicators as a sign that things are looking up. The bond market, meanwhile, continues to worry that the outlook remains grim. Yields have been bound in a range between 3.4% and 4% since late May, despite the dark warnings from those “bond vigilantes” that believe crushing U.S. debt will turn off our major foreign benefactors.

But a rally in both the bond and stock markets was a fixture of the financial scene for a number of years. Strong growth coupled with low inflation created the so-called Goldilocks scenario, where bond yields could rally, and stocks flourished in part due to lower borrowing costs.

Whether that can be repeated for any length of time remains to be seen. Stocks have rebounded from an awful several months but still remain about one-third below their peak. Yields are low, but 3.4% has been the floor, even with the inducement of the Federal Reserve buying Treasury securities.

The possibility exists that in coming years both stocks and bonds will deliver mediocre returns. Bonds have benefited from the intermittent breakouts of risk aversion that accompany bad economic reports or brief stock swoons. And it seems less likely that equities can keep running at this pace with the outlook for earnings – particularly profit growth – so unsettled.