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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Worswick who wrote (118)	9/19/1998 12:09:00 PM
From: see clearly now	Read Replies (1) \| Respond to of 2794

Thanks for making available to us your insight and incredible access to useful information ! This answers a question I was posing in June on the GLobal currencies thread..at the time those knowledgeable on the thread didn't appear to recognize the question (I am not very knowledgeable in this territory) or perhaps the problem or to know the answer..but intuitively I could see it coming! "assuming the people who engaged in the trade understood the trade...apart from the back office problems of "keeping up" .I have known two old bankers in my life who both told me that their younger colleagues are not unlike lemmings in times of fiscal exuberance and forget the "book" they were taught from only to turn for advice to the more prudent elders in the business (many times who did not advance in the organization) in times of difficulty. Thanks again for the thread..its superb!.

To: Worswick who wrote (118)	9/19/1998 6:36:00 PM
From: IngotWeTrust	Read Replies (1) \| Respond to of 2794

W quotes Barron's Quoted Andrew who sez 9/22/98: "The problem is that the chances of a major bankruptcy among financial institutions is rising." *********** Amen, Brother, and not only is it rising, Worswick, it is "converging" like never before. Excesses always come to these ends. God Help the "middle class" when they wake up and find their bank is broke... their 401-K is empty... and their jobs are gone to someone younger,faster,prettier,smarter, ...the virtual/derivative worker ant AND it is Jan 6, 2000 Glad you are alert and awake. Good Investing/Living, and glad to make your acquaintance! O/49r

To: Worswick who wrote (118)	9/21/1998 12:09:00 AM
From: James F. Hopkins	Read Replies (1) \| Respond to of 2794

Worswick; That article covers so much that's to investigate the validity of all of it could take more time than I have. One part of it did stand out as misleading, and is far more negative than possible. One of the best things about Andrew's report on equity options was that he put the market risks in context by quantifying, however roughly, options dealers' potential exposures to a nasty ursine turn of events. Which, for argument's sake, he pegged at a sharp 30% decline. The dealers' vulnerability, his report made clear, stems from their consistent failure to take the systemic nature of market risk into account when pricing their "insurance" products. The underpricing of options resulting from this "catastrophe myopia," Andrew reckoned, meant that the major dealers of equity options -- Merrill Lynch, Morgan Stanley, J.P. Morgan, Bankers Trust and Goldman Sachs, which in aggregate had equity of $33 billion -- could have found themselves on the hook for as much as $400 billion. for her to claim that as true or clear just tells me how little she knows about options. And that makes the whole article very questionable. --------------- These Big dealers don't get hurt on options such as this, before it can hurt them they short the stock so that all the option can do is close their short position. At that point they can pocket the premium and sell some more. -------------------- This is the second article Barron's has published in the last week that has been way off base. The first had to do With Mutual Funds and some sort of Oct selloff based on managers trying to lock in their bonuses..it was just a total bunch of crock. ------------------------ While I do question the global derivative market and know they are subject to a melt down, I don't know that it will happen any where near like they outlined, if at all. --------------- I do know that big arbitrage players write both ends of the major options in our market, and they mostly stay market neutral as they are interested in the premiums, they have the connections to short or go long any issue they write and pocket the premiums. Before the little guy can ever hurt them, they cover the bet, with a short or long position, in fact they seldom ever buy an option back. Most option buyers if they are speculating better be very good, as they are for the most part playing against other buyers in that pool , the big boys don't care who in that buy pool wins, they already have their rear covered. ------------------ I'm not a big player but watched a video tape were this one option floor trader who deals in intc options. That's it he plays no other stock and has been playing intc for years. It got me turning over some things in my mind. I did some foot work on xcit back in July when I just happened to see what they call a "lock". I managed to short the stock, and sell puts , but to cover my rear I bought some calls, ( i lost the call money ) but was situated that the puts closed the short putting me ahead. The lock part was that even had she gone up, my calls would have let me out with a small profit. They don't leave the spread open like that very often. Had I had the guts not to have bought the calls I would had done better. I bet the market markers who can see order flow don't have any problem with shorting and selling puts, as they know they can cover their short fast if buy orders start in. Jim

To: Worswick who wrote (118)	9/21/1998 10:46:00 AM
From: Henry Volquardsen	Read Replies (1) \| Respond to of 2794

Clark, I am a little skeptical of the article you reference. This guy Smithers seems to make a lot of extrapolations and assumptions and then refers back to them as fact. He states that equity options market makers are underpricing catastrophic risks yet provides no specifics that one can use to analyze the situation. He then uses the statement as a given in his ongoing critiques. Another questionable device is throwing out the notional amount of Japanese bank derivatives without making any comments regarding a qualitative analysis of the positions. He just lumps all derivatives in together. Even his numbers about bank capital are extrapolations. Anyone willing to do an hour or two of research would be able to find very precise numbers on global bank capital and would not have needed to use assumptions. Being in the head of a consulting firm this individual would certainly be capable of accessing such research. There are certainly risks and concerns about the global banking system and derivatives exposure. We've discussed many on this forum. But the referenced article strikes me as imprecise and inflammatory. I don't know the individual and can't comment on his capability but can't help but wondering if the tone of his article is influenced by his desire to sell his consulting services. After all if things are bad there is more reason for people to pay him for his help. Henry