Question to old timers(those who traded back in 1987)

[dbphoenix]

I learned that market perceptions are way more important than market reality or intervention.

That is, unfortunately, a lesson that has to be learned over and over again.

 

[Free_to_Trade]

Free to Trade,

Interesting to hear a first–hand account from across the Atlantic.

“many of the traders' models fell apart at those levels”. This made me laugh.

You survived (well done); what about the locals who were hit really big? What happened to them consequently?

“I...did...well, but aged ten years that day”. I’ll put this with my favourites quotes.


Grant.

To answer, this was a sea change in many ways. The pits absolutely changed after this. A few people who blew out returned with new capitalization. A few also returned as brokers, trying to scratch back their debt. But many just found other ways to earn money. Also noticable was that clubs in the financial district disappeared. Some of us used to start drinking in the vicinity of the exchanges just after the close and do "laps" by taxi up north hitting bars until we reached the neighborhoods where we lived. Ah to have that drinking stamina again!

I think what helped me survive was to remember the definitions of the the some of the variables of options models (Lim). Does anybody think ever about what happens when options prices actually move faster than the underlying price itself? It happened. What does an option represent? Does not an options price converge upon its intrinsic value? Of course.

Old pit talk, "Being long premium is like dying of cancer, being short premium is like dying of a heart attack".

As you might remember, some 13% of Wall St. disappeared just after Black Monday.
Firms went under. Lower Manhattan lost a lot of tenants.

And one horrible reality for me was that I worked for and cleared a firm owned by Continental Bank, which had to be bailed out by the Fed itself as a result of the crash. And just one market maker over at the CBOE brought down my clearing firm. He lost $47million being short puts. My firm stopped "issuing checks" for a few days and for some of us, even if we were not debit, we thought we'd have to get our money in bankruptcy court. Risk estimation after that became a cottage industry.

One thing that happened quickly in Chicago is that the city itself changed. Whole trading rooms disappeared. There were a lot of bank consolidations. "Money for Nothing and Chicks for Free" went away pretty fast, as did the perception that LaSalle St. was golden. The cost of entry for floor market makers became prohibitive and no longer was a neighborhood kid becoming a runner a path to potential riches. When I spent time in London I noticed that East Enders flocked to the Liffe just like Bridgeport kids did down at the CBOT.

One kid that I new who had moved to Chi from North Dakota moved back west and bought a big ranch in Colorado. Some of them just bought their memberships (which I did). Some of them left the floor to return as Commodity Trading Advisors, the next big thing of the 1980s and early 1990s. Some of them moved to London and Sydney, perceived at that time as fertile fields, for inefficient markets "that you could drive a truck though" (between the bid/offer). But many of them sold their Rolex watches to the pawn brokers in the vicinity of the CBOT.

Of course the industry thrived. But many things never have been the same since the crash of '87. I must admit I do miss the days before that event.

 

[grantx]

Free to trade,

This is like listening to old soldiers talk. Thank you for the contribution. Excellent stuff.

May I ask what you are doing currently?

Grant.

 

[BARLI]

Free to trade, thanks for sharing these extraordinary experiences with us! What you think is the best options strategy for today Stock Indexes would be?:idea:

 

[Free_to_Trade]

Free to trade,

This is like listening to old soldiers talk. Thank you for the contribution. Excellent stuff.

May I ask what you are doing currently?

Grant.

Trading. Also exploring doing more academic work (I've already done a good amount of that). Funny I don't feel like an "old soldier", but I am not sure I would want to stand in a sweaty crowd and get poked with pencils all day ever again. I miss being around the exchanges, though.

Back then the press liked to state that a 22% drop in the index in one day was a "one in 7,000 year event", the truth is that this depends upon the shape of the probability curve that one assumes. In many many markets we have had comparable crashes since.

What about the Real? The Ruble? Have you seen what some of the Middle Eastern stock indicies have done? For currencies in the 1930s the crash of the Reichsmark?

It could very well be that big financial events have much "fatter tails" and are far more probable than we want to admit or realize. And therefore we all must take into greater account the possibility of a comparable massive move in our stock indicies and seeing liquidity dry up. It is important to take a long view, at least that is what I got out of '87.
We could someday see a drop of 3000 points in the Dow in one day, that would be about a 22% correction from the recent high.

If you're going to sell premium, don't sell teenies, sell verticals instead. If you are trading options, butterfly your position.

Newly minted MBAs don't usually know how to trade a bear market. I've seen examples of that over and over again.

Also it is not like I "did a Soros", I am just a survivor.

 

[BARLI]

Marty "Buzzy" Schwartz was funny when he said that... Soros is also a survivor as we all know... Do you know Saliba personally?

 

[shortorlong]

If you're going to sell premium, don't sell teenies, sell verticals instead. If you are trading options, butterfly your position.

nice thread!
can you explain to a relative newbie what the above means?
Premium what?
teenies?
verticals?
butterfly?

 

[Rhody Trader]

I learned that market perceptions are way more important than market reality or intervention.

I would take it a step further and say that market perceptions are reality.

 

[Rhody Trader]

Newly minted MBAs don't usually know how to trade a bear market. I've seen examples of that over and over again.

Don't forget newly minted PhD's who haven't ever seen what real volatility is or how psychology can blow up models.

"Please. Can we all just act rationally? If everyone didn't panic our models would still be pulling endless loads of money out of the markets."

- to paraphrase something I read early from a quant who clearly got burned.

 

[Rhody Trader]

Drexel – I had to think for a while: Ivan Boesky (?), junk bond king, dodgey syrup, most misunderstood, and fall-guy. I had a lot of respect for him. He was an innovator. Maybe therein lies the origins of CDO’s.

That was Milken, not Boesky. The latter was insider stock trading.

Oh, and let's not forget about Portfolio Insurance.

 

[grantx]

Rhody,

You're absolutely right - Michael Milken. I stand corrected.

Free to trade,

"old soldier" as in someone who's seen real action.

Grant.

 

[Free_to_Trade]

Don't forget newly minted PhD's who haven't ever seen what real volatility is or how psychology can blow up models.

"Please. Can we all just act rationally? If everyone didn't panic our models would still be pulling endless loads of money out of the markets."

- to paraphrase something I read early from a quant who clearly got burned.

I wholeheartedly agree about PhDs and models. But I was talking about the floor and I think I knew of only two PhDs who were active in the pits. But there were quite a few MBA types down there. Upstairs trading back then was what people who wanted to lose a big edge did.

 

[mr_cassandra]

I was there and invested back then (and nowadays). Imo, the current us situation is not similar. In 1987 there was pure euphoria. Everyone and his brother either owned stocks or wanted to own stocks. I had a call from a relative asking iif she was the 'only person in america who didn't own stocks'. My buddy had people run up to him at his dads gas station asking for 'stock tips'.

I see none of that here this year.

This problem is the result of thousands of bad loans made to people who couldn't afford them, by institutions who could have cared less.

Yet, our media seems to have forgotten that it is the individuals responsibility to manage his finances.

 

[firewalker99]

I was there and invested back then (and nowadays). Imo, the current us situation is not similar. In 1987 there was pure euphoria. Everyone and his brother either owned stocks or wanted to own stocks. I had a call from a relative asking iif she was the 'only person in america who didn't own stocks'. My buddy had people run up to him at his dads gas station asking for 'stock tips'.
.

Perhaps not in Europe, but in China it's sure euphoria if you consider that only a couple of months ago - I don't know if it's still a frenzy out there like it was then - 300.000 people were opening new brokerage accounts. A day!

http://www.dailyreckoning.com.au/chinas-stock-market/2007/05/29/

Edit: Apparently it's still queueing to get an account according to this report from two weeks ago:
http://www.ft.com/cms/s/0/a94d3550-...uid=9c33700c-4c86-11da-89df-0000779e2340.html

 

[grantx]

FW99,

The Chinese markets are Communist Party rigged, ramped and manipulated. When it all goes bad we’ll have Cultural Revolution Part II – “Down with capitalist pigs”.

Do you think they all wear braces ala ’87?

Grant.

 

[mr_cassandra]

Strongly agree about China. I read that they were buying stocks on charge cards and hocking homes for same. Comments like 'this is my big chance, have to take it now'.

Classic pre-crash euphoria. (as regards China)

 

[Free_to_Trade]

nice thread!
can you explain to a relative newbie what the above means?
Premium what?
teenies?
verticals?
butterfly?

Premium = options premium. Long premium means a person is net long puts or calls,
short premium is a position that is net short options.

teenies= in the case of decimal traded options, an option trading at .01. In the bonds, 1/64th.

(Following applies to ED options, I am sure prices are way off)
Verticals= at a strike of 94 and underlying at 94, being long the 94 call, short the 94.25call. If you are short the 94 call vertical at .10 and the 94 call is at .12 at the 94.25 call is at .02, if the market rallies a bunch of handles away the worst you can do is to lose the difference between the strikes minus the premium you took in. You are (somewhat) protected by the 94.25 call. Just being naked short the 94 call at .12 or the 94.25 call at .02 means your potential loss can be very very great if the market moves big to the upside. (hope I said that right)


Butterfly: Many ways to construct them, but for example short butterfly means
Short 93.75 call, long 94.00 call, short 94.25 call. Long is vice versa. Likewise with puts.


Butterflied position: typically long the wings (the out of the money position calls and puts), short the at the money (straddles and strangles).

In the case of my big position in '87, I was long the wings and short the body at a gamma ratio that made me "longer " premium as the underlying moved multiple strikes away. This enabled me to create lots of deltas on the long side, sell them off near the top, then get shorter as the ED market then sold off another 150 points. Then I slowly "boxed off" my position, getting me flatter.
You have to understand stuff about convexity, concavity and slope to really understand what I mean, though.

Mr_Cassandra, I agree with you. The current market mood in stocks is no where near where it was in 1987, especially when you consider that we barely had a 10% correction and it took time recently. 1987 was a bubble or a mania. and frankly what you describe, (the negative factors), is in a way healthy. Market psychology now is not at all "one way" as it was back then.


My job at the time, however, was not to judge market direction or have a long term view. My job was to be as neutral as possible and react to very short term fluctuations in the pit, hopefully locking in the difference between the bids and offers. i was a market maker.

And to the person who asked about Tony Saliba in 1987, he was on the floor of the CBOE, but did occasionally make appearences at the CME and CBOT. I met him a few times.

 

[Rhody Trader]

Strongly agree about China. I read that they were buying stocks on charge cards and hocking homes for same. Comments like 'this is my big chance, have to take it now'.

Classic pre-crash euphoria. (as regards China)

I've heard essentially the same thing about Japan and the carry trade. Japanese housewives have been maxing out their credit to borrow Yen and put it into something that yields several hundred basis points more. OK. So this isn't firsthand knowledge, but I did hear it from a good source in the forex market.

You want to talk about damage getting done if/when that whole thing goes down. Yikes!

 

[BARLI]

I work as market maker now for israeli stocks... Of course today we dont have pits and its all electronic, but there's still a lot to learn from this job..Saliba said he was the only guy who had put options on October 19-th 1987 and sold 'em for a very good profit

 

[newstart]

I was around at that time and I don't think that the Market is anything like '87 conditions were entirely different I beleive the Market will recover but the Sub-Prime lending and housing Markets are in for a rational shake-out