Options and Monday’s Lows

Sometimes, short term mechanical concerns can magnify market moves.

Example: Consider option gamma and this week’s option expiration on Friday.

Very often, as we get closer to expiration, the underlying relationship between equities and their options can exacerbate market moves in both directions. Given the recent move off of the peak highs, and where many option traders made their purchases, the potential to dramatically impact downside action exists.

That’s especially troublesome if Monday’s lows on stocks are violated.

I am oversimplifying, but if Monday’s lows are breached, the ‘gamma’ effect of options may come into play. Gamma = Change in Delta/Change in Underlying Asset. As out of the money options go ‘into the money,’ it could force traders to rebalance their hedges, which in turns further aggravates the move to the downside.

As we get closer to Friday’s expiry, there is little premium left on expiring options. That can create a more intense gamma effect. (Options traders:  Please  correct my phrasing; I was never a trader on an option desk, and I may be misusing terms of art) .


This is merely a short term trading observation. Just an FYI . . .

Category: Markets, Options, Trading

Repeat After Me: Spending Surveys Are Meaningless

Category: Consumer Spending, Data Analysis, Economy, Financial Press, Retail

Repeat After Me: There is NO Inflation

Category: Commodities, Energy, Inflation

1987 Crash Revisited

Rob Fraim is a reader of mine who puts out his own
amusing comments each day via email. On the 17th anniversary of
the 1987 stock market crash, he put out his recollections from that
day, and we are republishing them today, the 20th anniversary of Black Monday.

I found them so interesting that I suggested Rob (who is
blogless) post them here. He gladly agreed. Without further adieu, here
is Rob’s version of 1987 Crash Revisited

October 19 – the day that each year gives old-timers in this business a renewed facial tic and post-trauma flashbacks.

What?” you say.  “You mean you were actually there, Grandpa?  You remember the Crash of ’87?

Yes, I was, and yes I do.  Confirming rumors that I am, in fact,
older than dirt I note that I was in this business in 1987 – and had
been for a few years prior (I started in 1983.)

I was having dinner last week with a friend who runs a hedge fund
(another graybeard, although he looks younger than me) and we ended up
talking about 1987.  He had a great story about the whole thing (which
I’ll let him tell you about someday if you ever get to have dinner with

So I thought I would take a moment to reflect on my own Crash
Experience – and perhaps some of you will share your October 19, 1987
story (provided you’re not a whippersnapper who would be relating what
was on freakin’ Sesame Street that day!  I really hate you guys.
You’re svelte and unwrinkled and smart and energetic and I’m just
liable to whup you if you’re not careful.)    Maybe we’ll even get a
recounting of the aforementioned dinner tale from last week.  So if you
feel like it, drop me a note with your recollections.  If I get enough
to make it worthwhile, perhaps I’ll compile them for sharing.)

Read More

Category: Investing, Markets, Psychology, Trading

The Bubble Man

Category: Digital Media, Federal Reserve, Inflation, Psychology

Only TV Reporter at the 1987 Crash

Category: Derivatives, Financial Press, Markets, Psychology, Television, Trading

1987 Crash: 20th Anniversary of Black Monday

Category: Markets, Psychology, Trading

Mid-October Linkfest: Week in Preview

Category: Financial Press

Hard Assets, Financial Markets, Risk/Reward Ratio: Where to invest?

Category: Commodities, Currency, Federal Reserve, Markets

Sunday Morning Paper

Category: Weblogs