Chapter 40 "Financial Lottery"
Options.
It has to be said that this is one of the most exciting and heart-pounding games in the financial market, without a doubt.
Simply put, options trading involves a "right".
The right to buy or sell an asset at a pre-agreed price at a specific point in the future.
Does that sound a bit convoluted?
In fact, among the veterans in the securities industry, this thing has a more descriptive name – "financial lottery".
That's right, it's the lottery.
The exchange will standardize these rights, package them, and list them on the stock exchange like stocks.
Then, these "lotteries" are usually sold by financial institutions, also known as "bookmakers".
Meanwhile, investors who dream of getting rich overnight pay a sum of money called "option premium" to buy their "hope of winning the lottery."
This type of "lottery" has another characteristic:
You can resell it to another seller at any time before the expiration date.
As for prices, they are entirely driven by market sentiment, fluctuating wildly and determined by the market's frenzy and the participants' heartbeats.
Of course, all lotteries are subject to a common fate.
The vast majority of options, when they reach the end of their life—that is, the expiration date—all meet the same fate:
It becomes a worthless piece of waste paper, too stiff even to wipe your butt with.
but!
Occasionally, in extremely rare circumstances... "Judgment Day" will descend unexpectedly!
"Holy crap! How many times is it now?!"
In an office in another skyscraper in Shanghai, a shrill voice, clearly choked with sobs, seemed to tear the air apart.
The man stared intently at the bright red candlestick on the screen, which seemed to pierce the sky, his voice trembling as if it were on vibrate mode:
"Just...it was nine...Holy crap! It's already ten times! Boss! A full ten times!"
"Ten times? My God! Doesn't that mean I'll have to...have to...have to add margin right away? That means I'll be liquidated?"
The head of the organization felt his heart was about to jump out of his throat, and his face turned ashen.
"Yes! Yes, boss! The exchange just called, like it's a matter of life and death, telling us to prepare extra margin immediately, otherwise..."
The words were left unsaid, but everyone present was well aware of the disastrous consequences.
For those who buy options, it doesn't matter whether the price rises to the top of Mount Everest or falls into the Mariana Trench.
If all else fails, I can just quit playing and sell my lottery tickets.
Or to be more straightforward, just throw it away on the expiration date; the only loss would be the premium you paid when you bought the "lottery ticket".
If we lose everything, that's it, next one!
So the question is, who will cry out in despair, and who will face utter ruin?
It was those "market makers" who initially sold the options!
These initial sellers, whether they are mutual funds, private funds, or securities firms' proprietary trading desks, must first pay a "margin" to the exchange to prove that they can bear potential losses if they want to sell options.
The rule is usually that a margin of at least 5 to 20 times the nominal value of the contract must be paid.
The problem is that if the price of the options they sell skyrockets like a runaway horse, far exceeding the margin they paid, then it's a disaster!
The "Margin Call" alert will be triggered!
It was like a death warrant, ordering them to make up the difference within a specified time!
If you can't come up with the money to cover this huge hole, then sorry, the exchange won't show any mercy, and the system will directly initiate the "forced liquidation" procedure!
"Forced liquidation? Absolutely not! I'd rather die than be forced to liquidate!"
The boss was hysterically roaring in the office, veins bulging on his neck, spitting all over his subordinates' faces.
Forced liquidation is an absolute nightmare.
No matter how powerful or large the fund or institution was before, once it is forcibly liquidated, trading will be immediately suspended.
Then the short positions will be forcibly closed by the system according to the current market price, which has skyrocketed to an unbearable level.
The losses were so severe that not even a trace of bone remained, enough to severely damage any organization, or even lead to its bankruptcy!
"Forget everything else for now! Quickly! Close out all the option contracts we sold at low prices earlier! Even if it means taking a loss! Even if it means huge losses! Close out all the positions we can!"
The boss was giving frantic instructions, his voice hoarse.
"But boss, even so... do we have enough money in our account to pay the additional deposit?"
Someone asked in a trembling voice.
"I've already reported the money issue to the Directors! They need to borrow funds immediately to tide us over! It's an emergency, we have to deal with it right now! The Directors have also given orders that we must close out all the sold options at all costs before the price skyrockets!! Regardless of the price! Hurry!!"
Initially, when the stock market crash triggered industry turmoil, the main panic was concentrated in the stock market.
Although the derivatives market was also affected, it remained relatively calm overall, and some people even adopted a detached, detached attitude.
Who could have imagined that this financial tsunami would come so suddenly? One second it seemed like a storm in the distance, and the next a huge wave crashed right at our doorstep, instantly engulfing the entire market in a sea of panic!
Now, these institutions mired in this situation are like houses suddenly flooded, desperately trying to scoop water out with basins to save themselves, but the problem is...
The water level didn't decrease; instead, it rose higher and higher!
Even more deadly is...
"Damn it! What's going on? The order book is full of buy orders to close positions, piled up like a mountain. Why isn't a single one willing to sell? How many times do these sons of bitches want to make before they're willing to stop?"
The boss stared at the long list of buy orders and the empty sell orders on the trading screen, trembling with rage, and slammed his fist on the table.
That's already ten times! A full ten times the profit!
However, the mysterious buyer, who was like a ghost and swept away almost all the option contracts circulating in the market, held onto these hot "death warrants" tightly in his hands, like a mythical creature that only takes in and never gives out!
They wouldn't budge an inch!
In this way, the already scarce supply in the market is completely locked up, and the price can only continue to soar like a rocket, rising wildly without any resistance!
At this rate, it's not impossible for the value to increase tenfold, twentyfold, thirtyfold... or even a hundredfold!
"That's fucking ruthless! Who is it? Which blind bastard is plotting against us from behind? Are they deliberately trying to drive us to our deaths, to play us to death?"
The boss's voice was filled with impotent rage and a hint of barely concealed fear.
***
Fang Huan Investment, Chairman's Office.
"Last month's performance was disastrous, and it looks like we can't expect anything this month either. Sigh, it's really been a run of bad luck; I haven't had a single day of peace."
Huang Fengwen, the director of Fang Huan Investment, rubbed his aching temples, his face etched with fatigue and gloom.
The Executive Director next to him Executive Director Liu quickly spoke up, trying to ease the tension:
" Chairman Huang, you can't say that. We did a very good job with risk control this time. The losses have been kept to a relatively small extent."
"What's the point of having the best risk control? In the end, we still lose money, don't we? Just today, how many loss reports have I received from various departments alone?"
Huang Fengwen was clearly in a bad mood and retorted angrily.
"Uh…that's true…" Executive Director Liu gave an awkward smile, not daring to argue further:
"However, look at the dire situation of the other private equity firms, some of which are reportedly on the verge of bankruptcy. Compared to them, we are really lucky."
In the market, there are bull markets and bear markets, ebbs and flows; this is an irrefutable truth.
The problem is that sometimes when a bear market comes, it's like the sky is falling and the earth is collapsing. It comes too suddenly and too frighteningly, and that's the most deadly thing.
"Thankfully, this time it didn't turn into a global financial crisis like the one involving the Lehman Brothers, otherwise we would all be starving."
Huang Fengwen said with lingering fear.
"Hey, Chairman Huang, compared to the subprime mortgage crisis of 2008, this little storm is nothing!"
Executive Director Liu echoed this sentiment, as if he had returned to that dark year.
"Back then, options also saw a crazy surge of more than 100 times! Many small companies and institutions couldn't withstand it and went out of business."
Even now, when Executive Director Liu recalls the 2008 subprime mortgage crisis that swept the globe, his legs go weak and his back breaks out in a cold sweat.
"Our company was also in a terrible state due to the additional margin call. In the end, the directors had to mortgage their properties to get a life-saving loan from the bank and barely get through the crisis."
Because of that unforgettable lesson, Fang Huan Investment has become particularly cautious about high-risk derivatives such as options ever since.
They redesigned the entire risk control system, with the core idea being:
It's better to earn less than to put yourself in a dangerous situation where you could be swept away by a single wave of market fluctuations.
In the event of another similar extreme market situation, at least the losses can be kept within an acceptable range.
"However," Huang Fengwen stroked his chin thoughtfully, "this market movement is probably a fatal blow to those 'market makers' who sold options."
"That's right!" Executive Director Liu nodded, a subtle, somewhat strange smile appearing on his face.
"I heard that many funds and securities firms are going crazy right now, trying to find ways to liquidate their positions but they can't find counterparties."
"Oh? What do you mean? Is it because the price is too high?" Huang Fengwen asked casually.
"Prices will definitely skyrocket, but that's not the most critical issue. The key is,"
Executive Director Liu lowered his voice, leaned forward slightly, and exuded a sense of mystery:
"Those mysterious buyers who swept up almost all the available options contracts before the crash... they absolutely refused to sell!"
"They won't sell?"
"Yes! They're just holding on tight and refusing to sell! Occasionally a few sell orders will appear on the market, but the amount is so small it's like squeezing toothpaste—it's a drop in the ocean, and it might even be deliberately released to keep short sellers hanging."
Executive Director Liu's tone was somewhat excited:
"The people who actually hold the large positions have been hiding behind the scenes, and nobody knows who they are. Now, a lot of institutions are practically staring wide-eyed, frantically trying to find out who has all these deadly 'death warrants' in their hands!"
"Wow! This is interesting. So, there's definitely some inside information behind this?"
Huang Fengwen immediately became interested, and his fatigue seemed to dissipate somewhat:
"They managed to snatch up all the goods in advance with perfect precision, and then stubbornly held onto them... That's ruthless! Absolutely ruthless!"
"Yes. I bet those sellers are really living in agony right now, watching helplessly as prices skyrocket, breaking their record for losses every single day."
Executive Director Liu's voice carried a hint of schadenfreude:
"If you want to close your position and save yourself, but you can't find a counterparty, that feeling... tsk tsk, you're almost drained of your blood."
As Huang Fengwen listened, he felt that something was amiss.
He glanced suspiciously at Executive Director Liu beside him. This guy had a faint smile playing on his lips the whole time, and that expression…
Why does he seem a little gloating, even a little smug?
The company's overall performance is under pressure due to this market storm, and this guy is still laughing?
"Hey Lao Liu," Huang Fengwen finally couldn't hold back any longer and asked, frowning.
"What have you been secretly enjoying yourself for since just now? Is there something good you're keeping from me?"
Executive Director Liu's smile widened, even taking on a slightly mysterious air:
"Hehe, Chairman Huang, haven't you ever thought about asking... who exactly is that 'mysterious buyer' who has turned the entire market upside down and kept countless short-selling institutions up at night, the guy who holds almost all the long options positions?"