it never hurts to be really lucky.
(For those of you too unfamiliar with some trading terms, there is a good financial dictionary here.)
It was 1986 or so. The CBOE was much younger then, much less crowded physically (but perhaps more chaotic anyway). The technology was far less sophisticated than now, especially all the (then) recently installed computer gadgetry. But trading was trading, and there was much that was the same. Market-makers still made bids and offers, shouting out quotes and interest levels, reacting to other’s shouts of same.
There is a new guy in the pit. There always is a new guy in the pit. This one had been here almost four days so far, had hardly said a word (which is typical of new guys). He is rumored to be a small trader, backed by some outside money, a total of about $100,000 in his account. In other words, he hopes to scratch out a living as a local, presumably. It is Thursday morning. Tomorrow is Friday, the third of the month, so it will be Expiration (November, if I recall correctly).
The new guy has found a position on the outskirts of the pit, in a less profitable zone. The pit wasn’t full, but still, he couldn’t move into other, closer, more profitable positions that were empty because those “spots” belonged to other, more senior traders. Even if they aren’t here, their space is there waiting (except in times of great turmoil, of course).
It is a quiet day.
OEX (the symbol for the S&P 100, a major market, “big” stock index) is trading around 225 and change. The NOV 230 calls, expiring tomorrow, are offered at 1/16 of a dollar, there is no bid. No one wants to buy these, they are almost definitely going out worthless, the OEX is a very stable non-volatile instrument, only rarely will it move that far in so few hours. But still, who would sell those options for mere pennies? In the options world, there are always a few people who try to make their money by selling worthless premium. It is a very risky business, you spend month after month ringing the cash register, over and over in a small way, then a month comes where everything blows up in your face and you lose a whole year’s worth of capital in one day. The art of the business is risk control, diversification, and keeping that (inevitable) loss as low as possible. Some of the offer in the NOV 230 call is people like that, hoping some dreamer wants to buy some lottery tickets. They are ready to sell something they think has no value. The rest of that offer is institutional, selling out-of-the-money premium against their huge portfolio.
In any case, there is no bid for those options. They are sitting there on the book.
It’s approaching lunch time, our new guy is exiting the pit, presumably to get food. On his way out, he stops at the front of the pit where the order book is most accessible. He quietly (by pit standards) calls out, “How are the NOV 230 calls?”.
The book person says, “There are a lot offered, over a thousand.”
The new guy says, “Buy the book.”, saying he will take the entire offered amount.
The order person says, “Looks like about 1200, here’s the contra-side numbers” and then she starts calling out the selling accounts for the new guy to record on his buy ticket.
Now, this is an outlandish trade, on its face. If he has about $100,000 then he has just spent about 7.5% of his working capital on this one highly dubious purchase. He quietly writes down all the numbers and leaves the pit.
Turns out, there aren’t 1000 contracts offered, there are 12000! The order person screws up the volume on the biggest ticket. The trader said “Buy the book” and then confirmed and left the pit (he didn’t return that entire day). The trader is responsible for all those contracts now, he should have stayed to make sure it matched right.
The new guy now owns a bit less than 12000 NOV 230 calls, having paid about $75000. Those calls are near-worthless and he spent much more than half his capital on them (but he does own the rights to huge leverage, up to 1.2 million shares of the index, so what if those rights are only valid for a few trading hours?). No one really saw this happen, even when slow an index pit is still chaotic, and everyone has their own business to watch. If anyone HAD seen this happen, they would be aghast.
The rest of the day the index creeps higher.
The next day, Expiration, the index moves upward with the strongest momentum seen in a very long time. The price of the index at the close is about 233.6. The NOV 230 calls are now worth $3.60 apiece. The new guy now has about $4.3 million dollars in his account.
No one ever saw him again. He quit the business, took his percentage of the found money and left the option world. Blind squirrel moves permanently to the land of nuts and honey…grin
(There is an uglier interpretation to this story, but I choose to believe this version. I wasn’t there, I heard this tale second and third hand through reliable witnesses, I feel confident of the main facts, but as to motives and other hidden stuff, I wouldn’t know…)
It was 1986 or so. The CBOE was much younger then, much less crowded physically (but perhaps more chaotic anyway). The technology was far less sophisticated than now, especially all the (then) recently installed computer gadgetry. But trading was trading, and there was much that was the same. Market-makers still made bids and offers, shouting out quotes and interest levels, reacting to other’s shouts of same.
There is a new guy in the pit. There always is a new guy in the pit. This one had been here almost four days so far, had hardly said a word (which is typical of new guys). He is rumored to be a small trader, backed by some outside money, a total of about $100,000 in his account. In other words, he hopes to scratch out a living as a local, presumably. It is Thursday morning. Tomorrow is Friday, the third of the month, so it will be Expiration (November, if I recall correctly).
The new guy has found a position on the outskirts of the pit, in a less profitable zone. The pit wasn’t full, but still, he couldn’t move into other, closer, more profitable positions that were empty because those “spots” belonged to other, more senior traders. Even if they aren’t here, their space is there waiting (except in times of great turmoil, of course).
It is a quiet day.
OEX (the symbol for the S&P 100, a major market, “big” stock index) is trading around 225 and change. The NOV 230 calls, expiring tomorrow, are offered at 1/16 of a dollar, there is no bid. No one wants to buy these, they are almost definitely going out worthless, the OEX is a very stable non-volatile instrument, only rarely will it move that far in so few hours. But still, who would sell those options for mere pennies? In the options world, there are always a few people who try to make their money by selling worthless premium. It is a very risky business, you spend month after month ringing the cash register, over and over in a small way, then a month comes where everything blows up in your face and you lose a whole year’s worth of capital in one day. The art of the business is risk control, diversification, and keeping that (inevitable) loss as low as possible. Some of the offer in the NOV 230 call is people like that, hoping some dreamer wants to buy some lottery tickets. They are ready to sell something they think has no value. The rest of that offer is institutional, selling out-of-the-money premium against their huge portfolio.
In any case, there is no bid for those options. They are sitting there on the book.
It’s approaching lunch time, our new guy is exiting the pit, presumably to get food. On his way out, he stops at the front of the pit where the order book is most accessible. He quietly (by pit standards) calls out, “How are the NOV 230 calls?”.
The book person says, “There are a lot offered, over a thousand.”
The new guy says, “Buy the book.”, saying he will take the entire offered amount.
The order person says, “Looks like about 1200, here’s the contra-side numbers” and then she starts calling out the selling accounts for the new guy to record on his buy ticket.
Now, this is an outlandish trade, on its face. If he has about $100,000 then he has just spent about 7.5% of his working capital on this one highly dubious purchase. He quietly writes down all the numbers and leaves the pit.
Turns out, there aren’t 1000 contracts offered, there are 12000! The order person screws up the volume on the biggest ticket. The trader said “Buy the book” and then confirmed and left the pit (he didn’t return that entire day). The trader is responsible for all those contracts now, he should have stayed to make sure it matched right.
The new guy now owns a bit less than 12000 NOV 230 calls, having paid about $75000. Those calls are near-worthless and he spent much more than half his capital on them (but he does own the rights to huge leverage, up to 1.2 million shares of the index, so what if those rights are only valid for a few trading hours?). No one really saw this happen, even when slow an index pit is still chaotic, and everyone has their own business to watch. If anyone HAD seen this happen, they would be aghast.
The rest of the day the index creeps higher.
The next day, Expiration, the index moves upward with the strongest momentum seen in a very long time. The price of the index at the close is about 233.6. The NOV 230 calls are now worth $3.60 apiece. The new guy now has about $4.3 million dollars in his account.
No one ever saw him again. He quit the business, took his percentage of the found money and left the option world. Blind squirrel moves permanently to the land of nuts and honey…grin
(There is an uglier interpretation to this story, but I choose to believe this version. I wasn’t there, I heard this tale second and third hand through reliable witnesses, I feel confident of the main facts, but as to motives and other hidden stuff, I wouldn’t know…)