[En] Ep0002 [Experience – Black Monday’s S&P500 Option] Weekly Traders Tribune


“Week before the massive collapse, suddenly the price range suddenly expands, except for the stock market
There was not much aura that showed imminent crisis”  David Gray

Nikkei 225 stock DOWN -14.90% -3055 JPY closing price 17450 JPY (previous day closing price 20500 JPY)

[Market report – Tokyo market closed]

Today’s Nikkei 225 average price also declined significantly from the previous day’s closing price of 20500 yen, following the historical decline of the New York market last night. The closing price is ¥ 17450, down 3055 yen. The declining rate was -14.90%, which is the largest drop in history, alongside Black Monday. Immediately after closing, a wide range of issues flooded with panic selling orders, and half of the top stocks of the TSE did not value. The front spot was 15965 yen, which is -4535 yen compared with the previous day, and the declining rate was -22.11%. It recovered slightly from the latter half, finished today’s deal with 17450 yen of -3055 yen (-14.90%) compared with the previous day.


This is the decline rate of “-14.90%” of the Nikkei Stock Average on the 20th (Tue) the next day from the “Black Monday” on October 19, 1987 (Monday), at the current market level (Nikkei Average 20500 yen ) It is fictitious news according to. Of course, the price range limitation system is different now, so it will be a different carrying in reality.


Black Monday is one of the most important lessons for all traders. Many books that recorded stock price and exchange trends at the time existed. However, I can hardly see anything written about “the option market for that day”. Although it is less information, I will summarize the “S & P 500 option” at that time with this traders’ tribune.


Under the extreme confusion situation like Black Monday, can we respond appropriately in the market? Now, let’s try to experience the option position against yourself.


First is Black Monday’s overview.


Black Monday

The biggest stock price crash occurred in history on October 19, 1987 (Monday). This crash has become a trauma of many investors even now. It is also the greatest lesson to learn about the occurrence and collapse of bubbles that have been repeated since then.


The Dow average stock price, which was $ 776 in August 1982, rose to $ 2,722 in August 1987. The volume of transactions during this bubble growth period has tripled, pushing up the world stock price by an average of 296%.


Optimism is prevalent in the market, and none of us took the story saying “Wait for stocks to buy and rise,” and “Can only make money by buying stocks”. Also at this time as well as in the past bubble growth period, it seems that it was said that “you have a stock even if you borrow” and “a man who does not have a stock are stupid”, so the madness was not crazy by the masses .


Investors who are closely watching these developments, such as popular behavior as if they continue to raise stock prices for eternity, optimism of the world, and high price disturbance after the ceiling, are aware of signs of a massive crash It should have been. And it should have been able to sell through the high price disturbance. A similar bubble will come to the future from now on, but at that time you will have lessons learned that you should not be swallowed by the masses.


There was no sign of collapse of stock prices, and it did not happen overnight. As mentioned earlier, the stock price ceiling was attached in August, and the crash occurred after the high price wave of two months.


The actual stock price crash began on October 14th of Black Monday last week. Black Monday refers to the day of selling and climax where this series of collapse has become the maximum width.


Wednesday, October 14
· Dow average stock index ↓ -3.81%


Friday, October 16
· Dow Average Stock Price Index ↓ -4.60%


October 19 (Monday) [Black Monday]
· Dow average stock index ↓ -2.2.6% (largest declining rate in history)
· S & P 500 index ↓ – 20.4% (maximum ↓ – 30%)


Tuesday, October 20
· Nikkei stock average ↓ -14.90% -3,836.48 yen closing price 21,910.08 yen


The Nikkei 225 average price on this day was the largest ever in both the declining width and the declining rate. Half of TSE 1st section stock stopped. However, when the Earth half-circumference, the NY market opened, the stock price played a major reversal of the century, the largest rise in history.


Dynamic Portfolio Insurance

In 1985, a new strategy using “option” Dynamic Portfolio · Insurance “was announced. It is a strategy developed by California’s LOR company (Raleigh O’Brien & Rubinstein) and is a strategy to completely insure (insure) the risk of price drop in the cash equity portfolio using index futures and put options.


In the dynamic portfolio and insurance strategy, theoretically it will be “gains / losses in the portfolio of cash equities + gains / losses on index futures = gains / losses on put options”.


In this operation method, the operation staff does not need to adjust the portfolio of cash equities, and will continue to buy and sell the quantities of index futures calculated by the option price formula. This strategy was explosively popularized mainly at institutional investors at the time, since it is not necessary to change the portfolio of cash stocks and adjustment is very simple with only trading of index futures.


John Strong, executive officer in charge of the Lincoln Pension Trust, also conducted operations under the “Dynamic Portfolio and Insurance” for S & P 500’s cash equity portfolio since the beginning of 1986. And for about 22 months until Friday, October 16, 1987, it says “It worked very well” according to LOR’s propaganda complaint.


However, during the four days from Monday, October 19 (Monday) to October 22 (Thursday), “Dynamic Portfolio / Insurance” came into dysfunction and the Lincoln Pension Trust gave a huge loss.


Why is it supposed to be an operation strategy that “insurance” the insurance “completely” risk of the decline in the cash equity portfolio of S & P 500. Why has it caused a huge loss?


Breakdown of each market due to volatility boom

That is due to the explosive rise in volatility due to the rush of selling on the mother market, the cash equity market, in the confusion market environment of Black Monday. As a result, the cash equities market, the futures market and the option market, which were usually correlated by arbitrage, were divided.


Because the price of the cash stock market with enormous trading orders is paralyzed, no one can issue the futures price fair value, and furthermore the option market can not calculate the theoretical value.


Therefore, “Dynamic Portfolio · Insurance” which is an operation method combining spot, futures and options, completely loses function as it is impossible to calculate appropriate futures adjustment value for falling hedge.


When the volatility finally regained calmness at the last trading day of Black Monday’s week, October 23 (Friday), the correlation between each market also returned to normal and “Dynamic Portfolio Insurance” also regained function . But that was after the big losses in the past 4 days.


Call Naked Long

Another record that it was taking a simple call buying (call naked purchase) position of the S & P 500 option is told vividly the impact of this explosive increase in volatility on the option price.


Buying a call option of S & P 500’s ATM (At The Money) in the week before Black Monday, the option price was 12 dollars at that time and the IV (implied volatility) was a little higher than 20% Says. And Black Monday attacked the market on Monday, the weekend, S & P 500 fell 20%.


Of course, buying a single call option is a position that does not benefit at all from the decline in the underlying asset price, and if the IV does not change at 20%, a 20% drop in S & P 500 will result in a $ 12 The call option is calculated with only 3 cents worth remaining.


Actually, however, the call option was said to be trading at $ 8.50. This indicates that the IV was rising to 60%, and the depreciation of the call option due to a decline in the underlying asset market of 20% was offset by the soaring volatility. Volatility has a tremendous impact on option prices.


World with ATM 60%

When the IV of the ATM is 60%, how much is the value of put’s OTM (out of the money) and FOTM (far out of the money) IV? Please try the image with Nikkei 225 option IV data.

[En] Nikkei225option IV data
Nikkei 225 option IV data at the time of collapse acquired by Smile catcher. ・Nikkei225F => Nikkei 225 fut...


Black Swan certainly reveals someday

At 9.11, the put option that ended at 7 yen the day before was close at 705 yen the next morning. As recently as popular with the Weekly option, there were only three days left, so many people would have thought about bringing bare selling Puts to SQ. It is instant death. Since the market is not open in the first place, there is no way to respond.


The next week of 3.11, a problem occurred in a place different from the market turmoil. Under the circumstances where the nuclear power plant was blown away and the market was the most dire situation, securities companies urgently reduced the maximum number of option selling open positions to “zero sheet.” Whether there is plenty in margin, it is a compulsory settlement of all substantial option open positions (Kabu.com Securities and SBI Securities did not take this measure). Even the most positive spreading strategy combined with buying balls and selling balls has been forced to disassemble by the end of the draw. Even while having losses, some people returned to cryingly weakening their teeth while clenching the position which would be able to recover, due to optional characteristics such as volatility decline and time lapse.


And Black Monday hit the Monday of the weekend. 20% decline in underlying assets, volatility rise, and division between cash, futures and option markets. The next largest reversal that will be the biggest raise in the history of the day after next, two days later.


Natural disasters, incidents, accidents, crushing of mysteries, sometime get involved in a crash suddenly coming if you are in the market.


Can you say that if you are suddenly hit by a real crash, unfortunately the position you hold at that time is disadvantageous, you can survive without being killed. Depending on whether you can survive or not, your life will change by 180 degrees. The biggest problem of option trading is how to get involved with Black Swan.


Black · Swan (up / down) – The essence of uncertainty and risk (Nassim · Nicholas · Taleb) is introduced here. I do not need to be a follower, but I must read it.



Thank you very much for reading to the end. Please look forward to the next issue.

Weekly Traders Tribune

【日経225オプション】専業トレーダー。Extremistan に生息するユキヒョウ、好物はクズOP。2005年にFXデビュー後、2010年からオプションをメインにトレード。3.11で吹き飛んだことを切欠に、とある天才プロ集団であるクローズドギルドで勉強させてもらえることに。以来、戦友たちと切磋琢磨しつつ【ギルドの訓え】を身に付けるべく実践し、真剣に日々の取引を積み上げています。本サイトの開設は2018.07。

[Nikkei 225 option] trader. Snow leopard living in Extremistan, favorite is garbage OP. After FX debut in 2005, we trade the option to main from 2010. By noticing what we blew up in 3.11 we decided to study at a closed guild, a genius professional group. Since then, practicing to acquire [Guild's lesson] while practicing hardly with the fellows, we are accumulating daily transactions seriously. The opening of this site is 2018.07. TOKYO, JAPAN.

[Monthly profit and loss]

2019.02 +330,000 JPY
2019.01 +474,000 JPY
2018.12 +1,735,000 JPY
2018.11 +371,000 JPY
2018.10 +1,947,000 JPY
2018.09 +201,000 JPY
2018.08 +556,500 JPY

Emon Report for Nikkei225option trading