Right I'm not endorsing any strategy here to buy or sell premium. I usually only comment on these broad theories that are put out there that selling risk has some built in edge. Edge is a little harder to come by then that. LOL.
I'd be curious to see what level of quick correction the more experienced traders around here build into their strategies. 20%? 30%? 50%? I need to learn a LOT more about risk management.
http://en.wikipedia.org/wiki/List_of_trading_losses Source of Loss Year Person(s) associated with incident Credit Default Swaps 2008 Howie Hubler WHERE ARE THEY NOW?: 'The Big Short' Edition http://www.businessinsider.com/where-are-they-now-the-big-short-edition-2011-11?op=1/?IR=T
Given that it's a real barn-burner day today, I'll tell the MSFT/JPM story. In 2003, MSFT came to a bunch of banks with a request to monetize their OTM employee stock options. The idea was that banks would bid for a package of options and delta hedge. A few banks participated and JPM decided that it "was an important franchise trade" and bid rather agressively. To make the long story short, I think in total they paid just under a yard of premium for a bunch of long-dated (5-8 years WAL) stock options. It came out to be about 65-70 million dollars of vega. Over a few years, the vols came in and they lost about 3-4 vols on the trade, so a couple hundreed bucks. Everyone who ever touched this trade on the trading side got fired. In fact, two successive heads of equity derivatives got fired over this trade.
Yeah, that is bullshit (a side question - why do people write to wikipeda if they have no clue?). The loss came from a ratio CDO trade that was intended to short the housing market. In 2006, MS management was getting concerned that housing is going to crack, so they decided to put on a short housing trade. They ended up doing two separate swaps of CDO tranches in a carry-neutral ratio. The "alpha" leg of the trade was a short equity tranche sized about 2 yards and the hedge leg was a long mezzanine tranche swap sized 13 yards or so. By the early 2007, equity tranches went to zero... problem was that mezz tranches started going to pretty much zero too and there was no liquidity to unwind this size. PS. Most impressive thing was that Mack was able to throw Zoe Cruz (head of capital markets) and Howie (who was a fairly junior guy) under the bus and get out of this thing untarnished.
A few people got killed by these types of tasty trades... Peloton, if memory serves, did smth similar. It is amazing how Mack managed to remain a "knight in shining armor" figure throughout it all.
Thanks SLE. Seems he was treated very well then. http://www.businessinsider.com/where-are-they-now-the-big-short-edition-2011-11?op=1/?IR=T " He left Morgan in October 2007, and was given "tens of millions of dollars in back pay.â "
Obviously, I don't know the exact details but I heard that he was "alowed to resign" (instead of being fired for cause) so he got to keep his unvested stock. I guess thats what they referring to as "back pay". It was a management-approved trade, he was simply structuring/executing it so it's fair. Also, he probably had a lot of interesting things to share with the world had they decided to actually wreck his life by firing him for cause. To be frank, I doubt there was ten million dollars worth of unvested stock (he was an executive director, not even an MD), but if there was, it's not worth much by the time it vested. The stock was worth 65ish in 2007 and over the next 3 years it went to 20-handle, with a nice little stop around 10 in 2008.