Whale Trade Short Gamma

The FT had an interesting article on Bruno Iksil with some excerpts from IM’s and emails in the days before the Whale Fail trade collapsed. It’s interesting to me from a trader standpoint to see how others deal with risk management problems and how large institutions actually ‘manage’ the risk. While there have been a lot of articles on the relative lax oversight, including to my surprise, using excel as the primary pricing and risk management tools, I thought the chart posting their daily P&L was intriguing to a short volatility trader such as myself. It’s a pretty good representation of how a short gamma position looks like when it goes bad:

Look at how the P&L really gets wild at the end of March and into April. There’s been a handful of times in my limited trading experience that I’ve been in a similar position (although I can only wish I had anywhere near the magnitude) Luckily there are methods to have limited risk and long gamma positions which profit from short volatility!


~ by largecaptrader on March 22, 2013.

3 Responses to “Whale Trade Short Gamma”

  1. Wow, that’s extraordinary… April 10th! Imagine the incredible feeling of losing $415M that one day and how hard it is to not accelerate the downward spiral. January 5th is interesting as well. Nearly back to even has a tremendous skewing effect on traders… It’s like the pro NFL wide receivers who drop an easy catch because they’re already looking down the field at gains/scoring. Catch the ball first! Interesting post… Thanks and all best!

  2. It’s amazing how surprised people get when you tell them thier banks are fixing the marks in the futures market. It’s a solid quantative strategy to encourage the integration of computers into the banking sector, but the drawbacks of this Bet-All-But-One roulettet strategy is having contracts expire at the one strike you weren’t betting on (by you I mean your computer of course). Now I love my Apples & Adderall so options trading just came natural; I also only invest (gambel) personally and for the networking banter. If you wouldn’t mind, I’d be interested in your thoughts on the ethos of mark fixing, and whether our demi-god like banks should be so concerned with fixing the strike prices on contracts. 2) If it is a good “risk management” strategy, should trading desks have people or computers monitoring those 15 seconds JPM takes to sequentially buy and sell all but one (the same one all the way down) contract? Seems like computures would really have the edge over employees in that competetion.

    • Thanks for the comment Scott. I think what you are describing is “pegging” and while a reasonable explanation is the positioning of market makers, it wouldn’t surprise me if banks gun for specific strikes. I’ll send you an email!

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