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Non-Tech : Derivatives: Darth Vader's Revenge
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To: Henry Volquardsen who wrote (259)9/29/1998 7:10:00 PM
From: Pete Schueler  Read Replies (1) of 2794
 
Henry, I don't pretend to understand the intricacies of derivative instruments but I'd like to revisit Stitch's comment about underlying physical assets that are the bases for options. For instance, say there is a commodity like gold and assume there is "X" tons total physical supply. Then assume that many "investors" believe that its price will go down and just as many others think it will go up. Now they buy options, puts and calls that amount to gold quantities that total 2X tons of gold. In this case could a sudden price move combined with physical delivery drive demand beyond supply and create a massive default?
Also, if this process begins to unfold won't the people on the wrong side continue to write more contracts to protect their underlying positions until they have created a real monster?

Thanks for your excellent comments, Pete
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