1987 & Skew debate

The_Krakenite

The_Krakenite

As a weeeee little boy, I still remember day after day the TV was full of the horror of the market-crash of 87.

I had long forgotten most of that, until recently I was watching a podcast by TastyTrade, and Sosnoff was talking about how skew didn't occur until the crash of 1987. Since then it existed because people have been terrorized of the reactions that the market can make (it wasn't believed before then that such a drastic move could happen so suddenly).

However, in an old book I am reading, (published 1981), the author already talks about skew (though he doesn't use that word). He even explains the reasoning for this premium difference between PUTs vs CALLs and uses the principle that stocks can have unlimited price highs, yet are capped at 0 on the bottom.

Maybe I'm over-simplifying this and misunderstood... but a few times now I'm seeing other authors/youtubers, etc, saying there was no such thing as skew/smile/etc before 1987...

I guess I'm just getting more confused the more I look into this?
 
The_Krakenite-I was a Member of The AMEX at the time. I started on the floor in late'82 as a wire clerk and then floor broker for Institutional off floor option traders. In early 1985 I started my own BD and became a independent Option Market Maker. I remember in most cases even before 1987, that OTM puts were higher than OTM calls, but maybe not to the degree as today. I remember it was common for customer flow to buy both calls and puts but some customers would do buy writes. Naked put selling was not common. I found that I was always selling the OTM call worth $1, then buying it back when ITM. When I bought it back, the ITM calls was always very cheap after being high at $1. Put call parity was different for each party because of margin and interest rates. Because the puts always had a bid, it was easy to buy ITM calls, short stock and sell puts and lock in free money. I'm not sure in this helps but ITM puts skews were also higher back then.
 
The_Krakenite said:
However, in an old book I am reading, (published 1981), the author already talks about skew (though he doesn't use that word). He even explains the reasoning for this premium difference between PUTs vs CALLs and uses the principle that stocks can have unlimited price highs, yet are capped at 0 on the bottom.
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Well technically if you short the same asset multiple times, you can earn more even when the price goes to zero so it's as if the price is dropping below 0. And depending on how many times you short the same thing, the price can technically drop infinitely below zero as well with no floors.
 
Robert Morse said:
The_Krakenite-I was a Member of The AMEX at the time. I started on the floor in late'82 as a wire clerk and then floor broker for Institutional off floor option traders. In early 1985 I started my own BD and became a independent Option Market Maker. I remember in most cases even before 1987, that OTM puts were higher than OTM calls, but maybe not to the degree as today. I remember it was common for customer flow to buy both calls and puts but some customers would do buy writes. Naked put selling was not common. I found that I was always selling the OTM call worth $1, then buying it back when ITM. When I bought it back, the ITM calls was always very cheap after being high at $1. Put call parity was different for each party because of margin and interest rates. Because the puts always had a bid, it was easy to buy ITM calls, short stock and sell puts and lock in free money. I'm not sure in this helps but ITM puts skews were also higher back then.
More...

Were you one of the dealers that made a killing on that day? https://www.washingtonpost.com/arch...ped-out/090c57f7-fc75-4f02-9d22-585cf53c8548/
 
No. At the time I was a MM in Seagate. It was part of a very short time I was not in Apple. I had small positions in Seagate and my P/L curve was generally an inverted U. I lost very little money in Seagate but was short 20 straddles in Apple the cost me $20K. Overall, between that Friday and Monday my loss has about $30K but I was profitable by months end. My daughters was born in July and I had small positions and was taking a lot of time off between June and November. That most likely saved me a lot of money.

JSOP said:
Were you one of the dealers that made a killing on that day? https://www.washingtonpost.com/arch...ped-out/090c57f7-fc75-4f02-9d22-585cf53c8548/
More...
 
Robert Morse said:
No. At the time I was a MM in Seagate. It was part of a very short time I was not in Apple. I had small positions in Seagate and my P/L curve was generally an inverted U. I lost very little money in Seagate but was short 20 straddles in Apple the cost me $20K. Overall, between that Friday and Monday my loss has about $30K but I was profitable by months end. My daughters was born in July and I had small positions and was taking a lot of time off between June and November. That most likely saved me a lot of money.
More...

you would be structurally short convexity?
 
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