This is Cool

Discussion in 'Wall St. News' started by PennySnatch, Mar 7, 2019.

  1. Gotta take my cut from fooking derivatives!
     
    tommcginnis likes this.
  2. SteveM

    SteveM

    Hmm. After seeing that, methinks derivatives are a ticking time bomb.
     
    tommcginnis likes this.
  3. Sig

    Sig

    Why? This is a notional measure, so for every option on APPL stock that's out there they're counting it as $175 of value same as a share of APPL. It's a whole lot easier to create options on APPL than new shares of APPL, so one would expect that there would be a whole lot of options out there on APPL and every other stock, as well as all the commodities. If you stop to think about it for a minute, it would be much more surprising if the derivatives market wasn't much bigger than the underlying market. I'd also argue that an APPL call option you buy for $1 is worth $1, not $175. On the flip side, the value of a share of APPL is $175, very different than the value of that call option. If you count them both the same, then of course you can get a chart that looks like this. I'd argue that financial ignorance on the part of policy makers and voters is perhaps a bigger ticking time bomb than "derivatives" as a class of some kind of inherent evil.
     
    Nobert, nooby_mcnoob and SunTrader like this.
  4. aqtrader

    aqtrader

  5. MattZ

    MattZ Sponsor

    Yes, but the risk is tied up to the notional value of the instrument. Therefore, the bigger the value the higher the risk.
     
  6. maxinger

    maxinger

    Is trading derivatives dangerous?

    It is like asking whether it is dangerous to get kidney surgeon to change your kidney.
    Of course risk is very low vs getting Tom Dick Harry to change your kidney.
     
    Nobert likes this.
  7. MattZ

    MattZ Sponsor

    ?
    Mortgage Back Securities were created by professional who did not know the underlying risk that they are taking on. They were the pros.
    Some OTC derivatives are so complex that when they blow up all say "oh, I didn't know that that this variable could do this". This diagram above is not an indication of exchange-traded products but OTC products that have a certain correlation to stocks, bonds, FX, oil, etc. When these correlations break, and panic liquidation starts then you get effects across the entire globe. Case in point: LTCM.
     
    maxinger and leon7 like this.
  8. newwurldmn

    newwurldmn

    What’s crazier is that a straddle has two times the notional as stock in these types of calculations.

    Plus 99percent of derivative trades by notional are simple interest rate swaps that get netted in valuation: you are paying fixed to me on a 5 year swap for 10mm, I am paying fixed to you on a 5 year 2 month deal for 10mm. Virtually no credit risk here.
     
  9. Sig

    Sig

    Not exactly. As @newwurldmn pointed out, many of these have very little risk. And back to my example, does either the buyer or seller of an APPL 180 call have any catastrophic meltdown risk that would justify the point the article and the poster I was responding to are apparently trying to make?
    Sure there are plenty of complex derivatives out there and they do pose a risk, I'm just saying that article and accompanying graphic is in no way representative of the actual magnitude of that risk and is quite hyperbolic.
     
    #10     Mar 7, 2019