Where were you on October 20, 1987?
For those of you laughing at the thought of even being alive on that date, your laugh is well taken. There are but a few hearty traders left who recall those tumultuous days and the blow-back thereafter. Those were wild days to be sure.
On October 25, 1987 the WSJ Had An Ad Seeking OEX (an Index on the S&P 100) Put Buyers
Here’s an actual ad from the Wall Street Journal on October 25, 1987 (I had to crop off the bottom of the page so you can’t see my chicken scratch memorializing the date) seeking put buyers. The ad was posted by disgruntled retail accounts who felt they’d paid too high a price for their puts.
But as an options market maker that day, I thought I was doing the “public” a service by filling their orders after many market makers just left the trading floor.
As a quick reminder, when a market maker sells a put, their hedge is to either SELL stock, SELL another strike call or BUY a put with another strike.
The “Plus Tick” Rule
In 1987, we had the “plus tick rule” which mandated no stock could be shorted unless it traded on a “plus tick” or “zero plus tick”.
To illustrate: The stock trades at $50, then $50 1/4. $50 1/4 is now a PLUS TICK (1/4 higher than the prior trade).
A trader places an order to sell stock short at $50 1/4. If the stock trades again at 50 1/4 (a zero plus tick) the trader could sell his stock short on that trade. UNLESS: there was a natural seller offering the stock at 50 1/4 ahead of the SHORT SELLERS order. ONLY AFTER AL THE NATURAL SELLERS WERE FILLED COULD A SHORT ORDER BE FILLED.
Let me remind you of that day: the market is down 500 pts and there’s not a buyer in sight. How many shares is a trader likely to sell short? Answer: VERY FEW.
We sold calls, bought other puts – anything that would make us delta neutral without adding to our vega risk. But – and this is the point – WE MADE A MARKET. That’s what our firms hired us to do, that’s what the exchanges expected of us. This ad is a reminder of those days.
After The Close
The firm I was working floor left the floor exhausted. Exhausted yet in good spirits.
The following morning was when we first started hearing complaints from clients unhappy at the price the purchased puts.
I’m still scratching my head over that one as theses were not small retail accounts. Rather, these were institutional money managers who put down order to buy puts all day long.
Three days later, this ad was in the WSJ. Luckily our clerks were told in the morning that when they were getting the time and sales on puts to get the same on the calls (same strike same expiration). Alongside this information was the price at which the stock was trading.
Long story short, we were able to show our superior within the firm as well as at the Exchange that we sold the puts in line with the price of the calls. The minutia of settling everything from those days out are long forgotten. What’s done is done.
Am I glad I followed by bosses to continue selling puts to the public and valiantly trying hedge myself? Damn Straight I’m glad.
Why? Because that was my job and what my superiors told me to do. The ultimate reward for having a great team and superiors who gave clear marching orders was a healthy profit at years end.
Tomorrow marks 28 years since that day. Not a remarkable Anniversary but still…. Does anyone have any October 1987 Stories to tell? Share them in the comment section below.