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Gold/Mining/Energy : Gold Price Monitor
GDXJ 87.56-4.9%4:00 PM EST
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To: lorne who wrote (78739)10/22/2001 2:00:15 PM
From: Hawkmoon  Read Replies (6) of 116752
 
Why would they hold both sides of a derivatives position unless they were expecting the underlying issue to make a large move in one direction or another? That would be the only scenario in which I could invision such a play.

It was equate to a "straddle" strategy where the trader buys both puts and calls at or near the same strike price, hoping that the issue would move big in one direction or other, with the profit from one canceling out and hopefully exceeding any loss derived from the other.

But again, this is just one more reason that folks have to be skeptical of "chicken littles" out there complaining about derivatives positions.

The only thing that a well structured and balanced derivatives portfolio has at risk is a freeze up in market liquidity due to an unexpected economic shock to the financial system (the WTC attack... biological.. etc) and even then there are risk mitigation strategies generally in place.

The worst thing derivatives have to fear is an abandonment of legal obligations to pay debts on some mass level throughout the world, such as all the nations of Asia or the Mid-East suddenly saying "screw you, we're going to default on all of our debts"..

And even THEN, various lending nations would have some flexibility in absorbing such a risk... but no doubt it would be mighty ugly for those firms who had taken on a bit too much risk.

Hawk
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