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One of the "easiest" guages of P.I. would be to examine call open interest
and compare it to put O.I. in the Index options. Look at
OEX...SPX....DJX. Where it fits examine both the future's options and cash
products. Only part of the P.I. is done in the listed market, but it
should act as a good benchmark.
One thing though, in 1987 it was really much more than a "stop order" the
process of dynamic hedging..shorting SPU futures in an attempt to replicate
put options..actually IMHO contributed and helped create the crash.
Dynamic hedging essentially forced the hedgers to sell futures into the
selloff. They fueled the rally on the upside and fueled it on the
downside. When you dynamically hedge you attempt to replicate the delta of
a put by shorting futures. If you need a given short delta you short
futures in the correct ratio to replicate the puts. When the market goes
down..real puts would grow in sensitivity...so you short more futures. In
essence you sell low and buy high...so you fuel rallies and selloffs alike.
The dynamic hedge business which was something like 50 - 100 Billion
dolars(depending on which estimate you believed) is much much smaller
today.
Tin Mervin Yeung wrote:
> Hi, RT,
>
> I think this is everyone's mind: buying stocks is a great idea, but is
> the crash (in 1987 fashion) likely to re-occur? We know that portfolio
> insurance was nothing more than a massive stop-loss order--it was
> insurance in name only. Portfolio insurance magnified the crash in
> 1987.
>
> For those of you really understand the equity market, is portfolio
> insurance still a significant force in stock market today? Where to
> find such information?
>
> Mervin
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