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Doc - given the whole LTCM debacle was so "hush-hush", how do you know
EXACTLY what their strategy was and whether or not options were involved ???
I mean all of the options gurus were involved....and they didn't use them ?
I find that hard to believe !!
> -----Original Message-----
> From: The DOCTOR [mailto:droex@xxxxxxxxxxxx]
> Sent: Tuesday, February 15, 2000 4:25 PM
> To: Lawrence Chan
> Cc: Omega-List
> Subject: Re: Trillion Dollar Bet - anyone impressed ?
>
>
> Your analysis of LTCM is incorrect. They were not OTM option
> sellers. They
> were dynamic hedgers and very little unhedged option trading was involved.
> Delta hedging doesn't work if prices are not continuous...add the
> leverage and
> that is what killed them. Think of a covered call write with
> huge leverage.
> Image what happens when the stock gaps down and the volatility
> goes up. You end
> up losing money on both sides of the position. The gap ... non
> continuous
> pricing .... means you can't adjust your hedges. Modest moves can be
> devastating because of the size of the positions.
>
> Lawrence Chan wrote:
>
> > the whole story was detailed in a book.
> > will find the title and post it.
> >
> > they basically sell some very very out strike options on some
> > exotic derivatives and bonds at a dirty cheap price, but
> > in HUGE SIZE all the time.
> >
> > so when the mkt start going against them FAST,
> > which is the key problem for option sellers, they cannot do
> > a thing but just watch themself sink.
> >
> > plus, they thought (like all option traders) the first move
> > against them is normal ... like 99% of the other trades they did,
> > the mkt SHOULD return to the original level ...
> >
> > Thus the mkt condition did not change against them, its just that
> > they failed to calculate the option price properly - using chaotic
> > assumption, instead of the stupid B.S. model :)
> >
> > With chaotic model, you do not sell very very out strikes, because
> > their prices instead of going very cheap, they can go inifinite in
> > many cases :)
> >
> > The moral is to LONG these cheap options at a rediculously cheap
> > price from time to time as lottery tickets .. who knows what will
> > happen :)
> >
> > I do know a friend who use part of his job salary to buy dirty cheap
> > options on OEX (before) and sp future options (now) every month.
> > He is toasted 90% of the time, but his net gain is in the
> millions mark :)
> > like last nov, dec, and the jan this year - he made back all the bets
> > he made in the past 2 years plus more.
> >
> > back to LTCM, as they are a fund, they are forced to perform,
> > thus, lottery type of trading cannot be used as the clients will go mad
> > on them ...
> >
> > -Lawrence Chan
> >
> > ----- Original Message -----
> > From: M. Simms <prosys@xxxxxxxxxxxxxxxx>
> > To: Omega-List <omega-list@xxxxxxxxxx>
> > Sent: Monday, February 14, 2000 9:59 AM
> > Subject: Trillion Dollar Bet - anyone impressed ?
> >
> > > Last week's airing on PBS of the LTCM debacle was interesting in that
> > very,
> > > very little details of the fund's techniques were unveiled.
> In fact, it
> > was
> > > kind of stupid when it was mentioned that LTCM dropped $500
> million in one
> > > day.....yet gave no clue as to how that was actually
> accomplished. It was
> > > probably a trading "record".
> > >
> > > Obviously these guys were leveraged with options and/or
> futures in such a
> > > way that long and short "bets" were supposed to offset each
> > other......based
> > > on prior relationships.....
> > >
> > > Moral of the story: backtesting alone won't hack it in the
> long run. When
> > > economic or market conditions change drastically, make sure
> your system
> > > either adjusts properly or STOPS TRADING.
> > >
> > >
> > >
>
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