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Strategies & Market Trends : Stock Attack II - A Complete Analysis
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To: Steve Lee who wrote (27824)1/20/2002 8:48:09 AM
From: stomper  Read Replies (1) of 52237
 
I've been thinking about this and poking around ever since you brought it up a couple months ago. I'm only nominally knowledgable about derivatives so I posted your question around a couple of places on the net...this was the most recent reply I've recieved so far. You make a very good point and I'd be interested if someone else could add some knowledge.

Some of things I see wrong here.

I. Puts and calls are regulated on an exchange and generally have good liquidity. The interest rate derivates are not regulated on an exchange, meaning they are no uniformity. Each one is an entity unto itself. therefore, there is no liquidity to sell a partial set if JPM needs the money (which they do).

2. Puts and calls have a defined risk amount. We do not know what the total risk amount is on these specialized contracts. Given the huge notional amount involved, I think it is prudent to be concerned since the amount dwarfs the global GDP.

As Zeal points out, they are leveraged more than LTCM was, so there should be a lesson in there somewhere.

3. Puts and calls are specifically defined as a derivative on one stock. The stock moves and the specific puts and calls against that stock move. There is no direct effect on other options.
These JPM derivatives could be (?) a web of tangled risk plays, some even acting as hedges against others. Think dominos.

This is the best I can do off the top of my head. If I think of anything else, I'll post it. Some others should have ggod ideas also.
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