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"Peter M. Beckwith" wrote:
> What I do not understand is why did Niederhoffer not offset his trades by selling futures to take care of some of the risk. He easily could
> have avoided those catastophic losses had he simply hit the sp market. That seems like a strategy. Regards Pete Beckwith
Peter:
I will attempt to answer why he did not sell futures
to hedge his position. I will make there assumption
that he had out of the money
puts which someone previously stated was the case. He
sold them supposedly
1 to 3 months before. We do not know for sure or what
strike price. Make the assumption that he was selling
way out the money (say 100 s&p points)
puts. The premium could range from 1 to 5 points ($500
to $2500 at the time) Information posted here states
he was selling on the 500 point down day adding to his
position. He probably got a margin call that night.
I am going on my memory with this because my chart has
been adjusted for the new contracts since then. The
market opened down and declined a little more, The s&p
futures made a low of around 844 and never saw tht
price again. It sounds like Refco had taken over
control of the account
before the open so he had no say in the situation
because they knew at that time the account was under
water. But if you assume that he could have sold
futures he would have compounded his error. He would
have been hedging at or near the low. He would be
short puts that were p[robally
in the money slightly and still out of the money. Say
800 to 850 strike price which would be roughly 100
points out of the money from when we estimate he sold
them. All the way up he would have lost more on the
futures position than he would have made back on the
decline in the value of the puts because they were all
out of the money one day later and expired worthless.
This assumption is if he had been able to ride it out.
But I think we can assume that if he had the capital to
hange in there he would NOT have hedged and collected
his priemium on expiration. He would still be around
and his ego would be bigger than ever.
Norman E.
.
Ira wrote:
>
> When your ego gets that big, and the God syndrome
> sets in, you don't need spreads, hedges or stops,
> because you are right. Ira
>
> "Peter M. Beckwith" wrote:
>
> > After reading his book, "The Education of a
> > Speculator", I came away with the feeling that he
> > really was a "risk taker" who had little concern
> > for risk management. In one of the sections in his
> > book he describes a series of currency trades where
> > he is just barely holding on and he is picturing
> > his bankrupt life if the trades do not go his way.
> > Let me be the first to say that if I were a big
> > time money manager and I described in a book that
> > was obviously supposed to be self aggrandizing,
> > that I was risking everything on a series of high
> > risk currency trades that I would be pretty
> > embarassed. When I heard in Oct, 97, probably a
> > couple of months after I finished the book that he
> > had liquidated his fund and had shafted all of his
> > investors, I could not help but feel that his type
> > of trading was completely insane. It is one thing
> > for a small lot trader to dabble in the naked
> > options writing during a downtrend, but it is an
> > entirely other matter for a guy who probably hit
> > the options market with several thousand naked
> > contracts. All I know is that when there is a guy
> > who is trading with size and he is selling naked
> > options that some savvy and well capatilized
> > trading group could have run the market down even
> > further to force liquidations. I honestly believe
> > that this may have happened on that fateful day in
> > Oct, 97. Anyone who is interested should look at
> > the VIX data from that day where the premiums rose
> > to 55 for a bried period during the AM. No
> > question that the guys who took the other side of
> > the trade probably made enough to retire on. But
> > by the same token they probably hedged. What I do
> > not understand is why did Niederhoffer not offset
> > his trades by selling futures to take care of some
> > of the risk. He easily could have avoided those
> > catastophic losses had he simply hit the sp market.
> > That seems like a strategy. Regards Pete Beckwith
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