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Strategies & Market Trends : Canadian Options -- Ignore unavailable to you. Want to Upgrade?

To: william smith who wrote (1036)	5/26/1998 8:12:00 PM
From: Porter Davis	Respond to of 1598

>>how many of Candian options are traded this way? Will, I assume you are referring to 'over-the-counter' options. The sad fact is that for every option traded on the TSE there are probably 8 or 10 traded OTC. The big firms that engage in this take a huge third-party credit risk (remember Confed Life?), plus they carry an un-quantifiable, but huge, market risk 'off-the-books'. If they, for example, sell 1000 TXO puts to a third party OTC, they may hedge by selling 80 TXF futures. The problem comes if there is a market 'break' like last October or 1987. If the T35 falls, say 25 points, they are no longer hedged...they must sell more TXFs or TIPs or TXO options--basically anything they can find a bid for. Multiply this by several firms here (and dozens in the States), and there is an almost unbelievable amount of forced selling that would appear in a severe break. Sure gives me pause... Happy trading. Porter