38 lines
3.0 KiB
Plaintext
38 lines
3.0 KiB
Plaintext
S64 Part V: Index Options and Futures
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However, the concept is still a valid one, and it is now generally being practiced
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with the purchase of put options. The futures strategy was, in theory, superior to buy
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ing puts because the portfolio manager was supposed to be able to collect the pre
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mium from selling the futures. However, its breakdown came during the crash in that
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it was impossible to buy the insurance when it was most needed - similar to attempt
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ing to buy fire insurance while your house is burning down.
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Currently, the portfolio manager buys puts to protect his portfolio. Many of
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these puts are bought directly over-the-counter from major banks or brokerage hous
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es, for they can be tailored directly to the portfolio manager's liking. This practice
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concerns regulators somewhat, because the major banks and brokerage houses that
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are selling the puts are taking some risk, of course. They hedge the sales (with futures
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or other puts), but regulators are concerned that, if another crash occurred, it would
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be the writers of these puts who would be in the market selling futures. in a mad fren
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zy to protect their short put positions. Hopefully, the put sellers will be able to hedge
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their positions properly without disturbing the stock market to any great degree.
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IMPACT AT EXPIRATION - THE RUSH TO EXIT
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Some traders persist in attempting to get out of their positions on the last day, at the
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last minute. These traders are not normally professional arbitrageurs, but institu
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tional clients who are large enough to practice market basket hedging. Moreover,
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they have positions in indices whose options expire at the close of trading (OEX, for
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example). If these hedgers have stock to sell, what generally happens is that some
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traders begin to sell before the close, figuring they will get better prices by beating
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the crowd to the exit. Thus, about an hour before the close, the market may begin to
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drift down and then accelerate as the closing bell draws nearer. Finally, right on the
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bell that announces the end of trading for the day, whatever stock has not yet been
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sold will be sold on blocks - normally significantly lower than the previous last sale.
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These depressed sales will make the index decline in price dramatically at the last
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minute, when there is no longer an opportunity to trade against it.
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These blocks are often purchased by large trading houses that advance their
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own capital to take the hedgers out of their positions. The hedgers are generally cus
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tomers of the block trading houses. Normally, on Monday, the market will rebound
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somewhat and these blocks of stock can be sold back into the market at a profit.
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Whatever happens on Monday, though, is of little solace to the trader trapped
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in the aftermath of the Friday action. For example, if one happened to be short puts
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and the index was near the strike as the close of trading was drawing near on Friday
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afternoon, he might decide to do nothing and merely allow the puts to expire, figur
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ing that he would buy them back for a small cost when he was assigned at expiration. |