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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Giordano Bruno who wrote (11997)	4/26/1999 12:05:00 AM
From: Lee Lichterman III	Respond to of 99985

>>How can they maintain these imbalances with existing margin limits? << I am no expert on the matter but a lot of the how was discussed on the Derivitives thread that Luke was active on. Margin limits are for us small guys. I believe the article was addressing the option writers mostly although I also know that at times, there have been more shorts that actuall stock at many of the brokerages. I beleive Datek got caught last year and has since had problems "getting shares" to short when last year they always seem to have plenty to go around. <ng> Anyway, I beieve the article was addressing how I write naked calls and broker "A" is short a few shares to cover it so he calls Broker "B" and they agree to cover it. Then you decide to write the same calls but broker "B" looks in his file cabinet and sees he is short a few shares and calls Broker "A" who agrees to cover the remainder. Neither one knows that those same shares either actual or just the cash to cover them is already spoken for. At some point in the future, the exercise call comes in and Uh Oh, not enough shares or cash etc. Now we have a problem. Multiply this by huge amounts and we have a serious problem. Especially if they are puts and not calls as the bubble starts to burst. Even the cash at most brokers is being spent in multiple ways at once even if it is the same dollar being spent in two or ten markets. The big boys hedge bets all the time as that is how they make their money. They think it is fool proof and it is, just ask LTCM. They are still unraveling the mess that was weaved there. LTCM had the hedge figured out perfectly and it passed very test except one. It always assumed that the spread narrowed as time passed whichit usually does.... usually. Last year the spread moved wider and suddenly LTCM owed more than it had. Sound familiar? If AG wouldn't have bailed them out right or wrong, I read that it would have brought down at least 3 other large funds which would have hurt a few others that would have hurt a few others etc etc etc. It is more complicated than I have room to write here and I admiot I don't understand how it all works completely either. The book the market wizards can give insight into how some of these plays go down. We bet on stocks going up or down. Most of the big players play the spread between our markets and foreign markets, differences in bonds and interest rates etc that don't amount to more than 1/16 or an 1/8 of a point. Of course those add up when multiplied by billions of dollars. Most of these trades never have the actual cash, but are done with IOUs approved in seconds with phone calls to major banks etc. There isn't time to check if that money is already loaned to someone else at the same time. It is the skeleton or uncle that no one talks about but most already know. The real world of finance scares the heck out of me so I just don't think about it. <ng> Good Luck, Lee aka the befuddled Ostrich