Eye On Our Subscribers...

One of the most compelling "Trends" in our business here at Research Edge is the quality, knowledge, and experience that continues to be communicated to us from our subscriber base. The power of networks is viral, and we are grateful for ours. Below is one note that I was given permission to post on the Crash of 87' by Carolyn Leonard:

I have been reading your Research Edge morning take on the market since early summer. I have really enjoyed your advice and your call to cash has saved me some money. I wish I had gone to 97% cash but I did go to 35% which was due to your call.

I am writing to you in response to today's article. I traded at the CBOE as an independent market maker from "76" to "97" I trade the OEX from 1985 to 1995. I was in the pits thru the 87 crash and I can tell you that the pit on a busy day would have about 600 traders, plus clerks, brokers and quote operators. On Black Monday when volatility exploded the pit had about 50 market makers after the opening plus brokers to fill paper plus exchange staff. There was plenty of room to roam the pit if you weren't frozen in your spot by fear. Our markets on the Put side were $10 points wide. The black box traders i.e. Timberhill, Hull trading, the Ritchie group etc. were pulled from the pit because the firms couldn't keep up with the quickly changing vols. The biggest trader in the pit that day was John Stafford. Brokers who had mkt. orders would come into the pit to buy puts and hunt for traders to fill their orders. Stafford stood in the back of the pit near where I stood and in desperation they would come to were we were standing and ask that we change the market to a price we would be willing to sell the puts. We could sell an out of the money put at $60.00 and then make the market $60.00 bid at $70.00 hoping someone would hit our bid. Very quickly with little changing our market became $70.00 bid at $80.00 and so it went until the end of that day. The most egregious pricing anomaly occurred the next day. There was a market order on the opening to buy 500 far out of the money puts, the book had the order and filled it at $65.00 which based on the pricing the market would have had to go down another 800 points. When we came out of opening rotation those puts were trading at $50. I don't know what volatility those puts opened at but I doubt anything has ever traded at that high volatility. It was nothing to sell a 5 point box for 6.50-7.00. Everyone was afraid of being caught either long extra puts or short puts.

I covered some puts on the opening on that Black Monday with the market down 200 some points at $35 the same puts closed with the market down 505 at $120.00 bid -130.00 offer. That's volatility!!!

Best regards,

Carolyn Leonard

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