Well, I thought you were coming at it from the edge side. Not bad I claim, but I am suggesting that you come to it from the risk side or at least from both sides and meet in the middle. The discipline this instills in a trader makes a huge difference. The point I am trying to make is that retail traders try to predict one market. Institutional traders take on positions in such a manner that the overall positions have a positive edge (some individual positions may have negative edge on purpose to boost the overall "edge" where edge is now profit/std(risk)!), and those positions are added when they reduce overall risk. It is a multi-dimensional chess game that not only reduces risk, it also allows strategy instead of pure tactics. It is like this. Retail traders are playing chess with one or maybe two pieces on a 1D chess board. Institutional traders are bringing all the pieces out in an n-dimensional chess game. One allows only tactical play. The other is tactical and strategical each in a positive feed back loop to each other.
BTW, options is a great training ground for traders. It is in a small way, an n-dimensional chess game. The problem is, the skill required to do it is not trivial. And here is a weird thing, it is too well understood! You wan the n-dimensional part, without the deep understanding!!! And therein lies the rub. Institutional type trading requires institutional type training. Most retail traders don't get the chance to work at GS, etc. But try to understand how an options market maker (a good one) makes money, and you are 60% of the way or learning the correct way to trade ANY market.
It is good that you bring up LTCM. Trade like LTCM (note just how hard that is from just about every conceivable angle), without the bugs! The "bugs" were mostly humongous leverage. There were others but less offensive. "In panicked markets, all correlations go to one". If they could survive the panic, they would have made coin over coin. Therefore, risk has to be assessed equally to edge for "black swans". But they were THE perfect example of playing a not well understood multi-dimensional chess game (at the time). The risk part by taking massive leverage was pure ego and led to their demise.
I think that it also illustrated that if you are large enough, you become the market...whatever edges may exist in some obscure market become virtually non-existent when you have to sell and there are few, if any, bids...I see alot of similarities nowadays with some of the debt out there...the difference is who holds that stuff...
I doubt even that was it. They were soooooo confident in their "intellectual modeling".. they traded on what, 100:1 leverage? That means, a -1%, "noise counter" wipes out their capital. Who the Hell is that fucking smart (or has that kind of hubris) to believe they can codify the "market's anything" to within 1% and risk everything that they are correct? Those stupid intellectuals deserved to get FUCKED... though the rest of the world didn't deserve to get taken down because of them.
Things turned on a dime in the summer of 1998...what looked great in May looked like death by late July...Let's also not forget that the LTCM debacle was the pre-cursor for a very involved Fed, which set the stage for "moral hazard"...the interest rate cut on 10/15/98 set the stage for the massive blow off move in equities that followed in 1999-00...
A decent article for those that are leveraged. "It seems like a once in a hundred year flood comes along every ten years". http://www.ritholtz.com/blog/2011/03/black-swans-100-year-floods/ "Every time there is a major crisis, I get asked “What should investors do Now?” My answer is always the same: The time to look for the emergency aisles and where the exits are located is before takeoff, not after the wings fall off the plane. You must have a plan in place to deal with unanticipated events, a just-in-case things head south scenario. Ideally, you put this plan together when you are objective and unemotional and calmly contemplative — not when things are figuratively and literally melting down. The people claiming you cannot anticipate an Earthquake/Tsunami/Nuclear accident are missing the point: We can anticipate disruptive events, as they come along all too frequently in history. Consider the following list, via Doug Kass of those 100-year flood/once in a lifetime events. These occur far more regularly than most people believe: Black Swan events over the past decade • Sept. 11, 2001, attacks on the World Trade Center and Pentagon; • 78% decline in the Nasdaq; • 2003 European heat wave (40,000 deaths); • 2004 Tsunami in Sumatra, Indonesia (230,000 deaths); • 2005 Kashmir, Pakistan, earthquake (80,000 deaths) • 2008 Myanmar cyclone (140,000 deaths); • 2008 Sichuan, China, earthquake ( 68,000 deaths); • Derivatives roil the world’s banking system and financial markets; • Failure of Lehman Brothers and the sale/liquidation of Bear Stearns; • 30% drop in U.S. home prices; • 2010 Port-Au-Prince, Haiti, earthquake (315,000 deaths); • 2010 Russian heat wave (56,000 deaths); • 2010 BP’s Gulf of Mexico oil spill; • 2010 market flash crash (a 1,000-point drop in the DJIA); • Surge of unrest in the Middle East; and • Thursday’s earthquake and tsunami in Japan. Do you have an emergency plan ready for when things get dicey . . . ? Why not? The time to do drills is before the blitz, not after."
Simple... whatever you think you "know"... however "smart" you think you are, however "confident" you feel... YOU COULD BE WRONG THIS TIME. PROTECT CAPITAL. LIVE TO FIGHT ANOTHER DAY. TRADE WITH STOPS!! Geez... should be a "no brainer".