|
PureBytes Links
Trading Reference Links
|
Let's separate speculations from facts. I have retrieved two postings I published at the
other investment forum:
Posting #1: Selling Options in October 1997 and May 2006 by a smart option trader
Posting #2: Trading by Victor N. in October 1997
Reminder:
Subject of all these postings is the implied volatility and missing of this data for
futures
in TS 8.1; I am sorry that discussions are covering subjects only remotely related to the
implied volatility
DC
------
Posting #1:
I was able to retreat data for selling deep out-of-the-money options (with real money) in
October 1997. Actually, the identical situation just happen last month.
In both situations, October 1997 and May 2006, market did not reach the striking price,
and stayed more than 50 points above it. As a precaution, in both cases, hedging was done
at price that was causing about 8% loss minus the profits from earlier in the month. When
the market bounced, the hedge was exited and everything was set for the options to expire
worthless, in both cases the loss was less than 1%. Due to other proprietary factors
(beyond the scope of this e-mail), my account did not suffer any loss.
Posting #2:
>> Neiderhoffer was a writer of options
Victor Niederhoffer (correct spelling) was actually financially killed in Thailand. Only
after that, driven by desperation and gambling on rise of S&P 500 futures, he sold PUT
options too close to the index and lost.
When you sell deep out of the money options for steady 25-30% annual gains, you don't
behave like the desperate Victor N.
When you drive a car, and close your eyes, you are facing unlimited risk, similar to
option seller is facing. But you don't drive the car with closed eyes, and you don't trade
options without risk management in place, many methods described in "The Complete Guide to
Options Selling."
Read more about Victor:
http://db.riskwaters.com/public/showPage.html?page=104767
This unfortunate state of mind led him into danger. In 1997, he bet heavily that the Thai
baht would rise; he was to be proven wrong. During August, he lost nearly half of the $130
million fund he was managing as the baht fell. “I reached for things that had a
qualitative, but not quantitative similarity [to previously successful strategies].
Basically, I got killed in Thailand,” he says.
The impact of the burgeoning Asian crisis then rippled across the globe. And in October,
another boldly bullish position effectively wiped out Niederhoffer’s funds. Convinced that
the index would rise, he had sold put options on the S&P 500 index. Unfortunately, US
stock markets went into free fall. On October 27, 1997, the Dow Jones industrial average
fell by more than 7% – its largest single-day percentage drop. Trading of the most popular
index derivative, the S&P 500 futures contract, was halted on several occasions as
plummeting indexes caused exchanges to trigger circuit-breakers – effectively rules
whereby markets are temporarily closed to restore orderly function.
http://www.dailyspeculations.com/Letter/FTprofile050103.htm
Then, in August 1997, Mr Niederhoffer lost $50m, almost half his funds under management,
after taking a mistakenly bullish stance on Thailand. He recovered slightly but was forced
to close two months later after a disastrous bet on the S&P 500 index wiped out his fund.
http://www.dailyspeculations.com/vic/goodboy_interview.html
... Victor Niederhoffer web site
Greetings, my name is Dave Goodboy, I’m executive producer of Real World Trading. This
week, I am truly honored to be joined by Victor Niederhoffer and Laurel Kenner. Victor is
a legendary speculator, market philosopher, gamesman, and racquet sport champion. He
worked directly with George Soros and was ranked the number one hedge fund manager in the
world for several years then disaster struck. In 1997, an overly expansive speculation in
the Thai stock market caused spectacular losses in his accounts. Due to extensive
leverage, his losses were magnified over and above his 50% loss in Thailand, and spillover
effects from that debacle caused his fund to be well over its head in U.S. equities when
they closed down limit on Oct. 27,1997.
In short, a combined sequence of events – huge declines in individual Thai stocks, losses
in the Thai currency and the closing of the U.S. stock market and extensive up moves in
the prices of options the fund was short; all came together in one day, in a short and
disastrous coincidence. The loss, over and above profits made and withdrawals from the
fund, totaled approximately $50 million
http://registeredrep.com/mag/finance_resurrected/
For Niederhoffer that point came in October 1997, during the Asian currency crisis, which
was sparked by the devaluation of the Thais bath, which had a ripple affect that upset the
world's financial markets. Characteristically speculating against the flow, Niederhoffer
bet big that U.S and Thai stocks would move upward using highly levered futures and
options contracts. But the markets plummeted, triggering a rule that closed the NYSE. As
Niederhoffer notes, “Confronted with a demand to come up with many millions to meet
margins the next day, I was forced to close my fund.”
As longtime Niederhoffer partner Steve Wisdom explains: “We got sucked through the Asian
crisis. We were completely long and wrong and lost half our equity over a couple of
months. Bear in mind the Thai stock market, as denominated in U.S. dollar terms, went down
by 95 percent in a couple of years, an almost inconceivable decline. We lost a substantial
amount of money even though we weren't that levered. Then, weakened, we were doing some
options and futures trading, as we always do, and within a couple of weeks we had taken
such a cash hit from that loss, and an even worse illiquid loss in the emerging markets,
that all of a sudden we were just pinned to the wall.”
http://www.dailyspeculations.com/vic/refco.html
On Oct 27, 1997, the Dow dropped 550 points by 3:30 p.m. EST. Based on circuit breakers in
existence at the time, all trading in stocks was closed for the day, for the first time in
modern history. Under these chaotic conditions, the accuracy and stability of the pricing
of our options portfolio was uncertain and variable, relative to the exchange, clearing
house and time at which they were marked to market. Nobody was certain what would happen
if the chaos continued. Refco, on its side, had to meet capital and liquidity requirements
to satisfy regulators and their clearing company. They expressed their desire to have
control of the timing and treatment of the positions outstanding. They asked that all the
transactions between us, all the debits and credits, all the assets and liabilities, and
all the obligations and commitments of my funds be for their account, and that we should
each call it a day.
|