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To: Bonnie Bear who wrote (36077)	4/24/1999 9:40:00 PM
From: Defrocked	Read Replies (2) \| Respond to of 86076

Jeeze Bonnie, whoa. Your "free-association-cognitive-attack" on options pricing was fairly wide of the mark.<g> Firstly, the interest rate is already assumed to be a constant in the B-S formula. Most traders that sell options manage their exposures by offsetting the derivatives with other option strikes or the underlying stock. Essentially, they are spreaders that have an equity-neutral book and are financing their positions at a lower cost of funds than that imbedded in the option premium sold to the public. Secondly, volatility doesn't get "maxed out" during short covering rallies. Vols on many high flyers can be anywhere from 50% to over 100%. But I believe you'll find that most volatilites actually decline during rallies rather than increase. Vols increase on the downside during crashes because the public scrambles for insurance and the floor raises prices due to higher hedging risks and costs. Option demand drives volatility not stock prices. Finally, option trading is regulated from the sale (by SEC/NASD), to the execution (by the broker and exchange), to the money transfer (by the broker and NASD). There are far less abuses in option trading than there are in Inut bucketshop transactions. Derivatives are not driving this mania. The Fed understands options trading far, far better than what is driving P/Es. The "fatal flaw that will kill this country"???? Find another bogeyman.

To: Bonnie Bear who wrote (36077)	4/25/1999 10:17:00 PM
From: Brom	Read Replies (1) \| Respond to of 86076

Thanks for the rundown on how money-center banks and brokerages create derivatives to balance the public's positions in the underlying stock and options. I judge that they then manipulate the price of the underlying stock to achieve a positive financial result for themselves. It appears to me that the "titanic bubble" resulting from all of this activity has created a financial iceberg in which the visible security is just the tip of a larger mass of derivatives which we can neither see, measure nor understand the implications of. This is unmanageable and not susceptible of regulation. Does this bother anyone or am I just off base?