Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: GROUND ZERO™ who wrote (81805)	10/11/2008 9:16:43 AM
From: Real Man	Read Replies (3) \| Respond to of 94695

Exactly, that's the old point. They write puts and calls, which they dynamically hedge, but the volatility spike substantially increased the real value of the whole options market. Most of them are now bankrupt, I'm afraid. And yes, I wish I wasn't right, and I wish the regulators dealt with regulating OTC derivatives before they grew this huge, instead of what they did - backstopping that market with liquidity injections every expiration (these are the "PPT" rallies), so the Ponzi scheme reached unimaginable highs. Now we HAVE to deal with it, and the only way I see is to close the markets and settle all contracts as of Friday close, although settling them in a fair way may not be possible (counterparties can't deliver). The standard trigger of expiration week rally, OOM put options premium evaporating as time goes by along with the need to hedge, is very questionable at this point. It might work, who knows, but the odds favor a continuing crash, I am afraid. Things are not obvious. You are right, the obvious thing is to pick up the pieces after options sellers go bankrupt, since they will tend to drive things way too low as they go broke, although it's not entirely obvious when. -g-

To: GROUND ZERO™ who wrote (81805)	10/11/2008 9:43:07 AM
From: Real Man	Read Replies (1) \| Respond to of 94695

Here is where we are again - uncharted waters... only 1987 is higher. VXO goes back to 87. Markets may have to stay closed next week. In 1987 the same dynamics crashed things, and that year was the birth of Fed management during expiration, which has led us to where we are today. The next day bounce was due to the PPT intervention, the birth of PPT. Now the system is 1000 times larger. It did get modified quite a bit, but at the core the risk of a large spike and huge selling due to illiquid derivative markets remains. We did reach above 100 on the VXO, only slightly below 1987 crash levels. The likely scenario? We really crash on Monday, this Monday, then they close the markets. Unfortunately. I hope I am wrong, and the derivative markets will continue to function properly and produce a rally.