October 87 short calls blow up

TraDaToR

TraDaToR

Hello,

I am reading Allen Baird's book on option market making( a great read... ) and he mentioned traders blowing up being short CALLS during the crash of '87. I knew it was possible to be right on direction on short options but still lose when IV is exploding , but not to the extent of literally blowing up... I am not an option trader, so I am probably underestimating vega and more generally extrinsic value of options.

Has there been such occurences in recent history? In 2000? 2008? Flash crash?

When you come back home and have to tell the wife about it, it doesn't make much difference( since the only thing that will register in her brain is the "blow up" part , not the "short calls"...LOL ), but from a trader perspective, it must be terrible being "right" and still blow up. It mustn't have happened to low leveraged traders though...
 
TraDaToR said:
Hello,

I am reading Allen Baird's book on option market making( a great read... ) and he mentioned traders blowing up being short CALLS during the crash of '87. I knew it was possible to be right on direction on short options but still lose when IV is exploding , but not to the extent of literally blowing up... I am not an option trader, so I am probably underestimating vega and more generally extrinsic value of options.

Has there been such occurences in recent history? In 2000? 2008? Flash crash?

When you come back home and have to tell the wife about it, it doesn't make much difference( since the only thing that will register in her brain is the "blow up" part , not the "short calls"...LOL ), but from a trader perspective, it must be terrible being "right" and still blow up. It mustn't have happened to low leveraged traders though...
More...
there were traders that covered deep in the morning puts in the morning or went long puts in the morning of the reversal paying triple digits prices and losing 80% by days end.
 
I meant being right on underlying direction.

Martinghoul, was it during august 07 " first crash"? Interest rates went up abruptly? Were there some casualties?
 
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Yes. That's true. I lack the multidimensional thinking. options are really 2 bets in one.
But acknowledge it is counterintuitive.

Are there some other famous hedge fund blow ups on these?
 
There are probably are a lot in the exotic space. Marty will know better then I. When you have currency pegs a lot of guys try to sell against the peg. The reality is, vol can explode near a barrier even without the barrier ever being broken. THAT is counter-intuitive.
 
Martinghoul said:
I recall observing something similar in 2007 in interest rates... This type of stuff doesn't count as "being right", though.
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Your former colleague JW and his BSD-style trades? That was not being right, that was being VERY WRONG :)
 
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