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 markets, if not the most.
Simply put, options trading involves a "right."
The right to buy or sell a certain asset at a pre-agreed price at a specific point in the future.
Sounds a bit convoluted?
Actually, in the mouths of seasoned veterans in the securities industry, this thing has a more vivid name—"financial lottery."
That's right, it's a lottery.
Exchanges standardize these rights, package them, and list them like stocks.
Then, financial institutions, usually the so-called "market makers," sell these "lotteries."
And investors dreaming of getting rich overnight pay a sum of money called a "premium" to buy this "hope of winning the lottery."
This kind of "lottery" has another characteristic:
You can resell it to another party at any time before it expires.
As for the price, it's entirely driven by market sentiment, fluctuating wildly, determined by the market's frenzy and the participants' heartbeats.
Of course, like all lotteries, it shares a common fate.
The vast majority of options, at their end—the expiration date—fail in the same way:
become a worthless piece of paper, too stiff even to wipe one's bottom with.
But!
Occasionally, in extremely rare circumstances… "Judgment Day" will arrive with a vengeance!
"Holy crap! How many times is it now?!"
In an office in another skyscraper in Shanghai, a shrill voice, clearly on the verge of tears, almost ripped through the air.
The man stared intently at the bright red candlestick on the screen, its tip piercing the sky, his voice trembling as if on vibrate mode:
"Just...just now it was nine...holy crap! It's ten times! Boss! A full ten times!"
"Ten times? My God! Doesn't that mean we'll have to...have to...add margin? Got liquidated?"
The firm's boss felt his heart pounding in his throat, his face deathly pale.
"Yes! Yes, boss! The exchange just called, like it's a death knell, telling us to prepare extra margin immediately, otherwise..."
He didn't finish, but everyone present understood the catastrophic consequences.
For those who bought options, whether the price soared to Mount Everest or plummeted to the Mariana Trench didn't matter much.
They could simply quit, sell their "lottery tickets";
or even more simply, throw them away on the expiration date, losing only the premium they paid for the "lottery tickets."
Lose everything, next!
So the question is, who will be crying out in despair, and who will be utterly ruined?
It's the initial group of "market makers" who sold the options!
These initial sellers, whether mutual funds, private equity funds, or brokerage firms' proprietary trading desks, had to deposit a "margin" with the exchange to prove they could bear potential losses before they could sell options.
The rule is usually that they must deposit at least 5 to 20 times the notional value of the contract as margin.
The fatal flaw is this: if the price of the options they sold skyrockets like a runaway horse, far exceeding the margin they've paid, it's a disaster!
A "margin call" alert will be triggered!
Like a death knell, they're forced to make up the shortfall within a specified time!
If they can't come up with the money to cover this massive deficit, then sorry, the exchange won't show any mercy; the system will immediately initiate a "forced liquidation" procedure!
"Forced liquidation? Absolutely not! I'd rather die than be forced liquidated!"
The boss roared hysterically in his office, veins bulging in his neck, spitting all over his subordinates.
Forced liquidation—that's a nightmare within a nightmare.
No matter how powerful a fund or how large an institution was before, once forced liquidation occurs, trading will be immediately suspended.
Then the short positions will be forcibly liquidated by the system according to the current, despair-inducing market price.
The losses... were utterly devastating, leaving not even a trace, enough to cripple any institution, even bankrupt it!
“Forget everything else! Hurry! Close out all the option contracts we sold at low prices! Even if it means taking a loss! Even if it's a huge loss! Close out everything you can!”
The boss frantically directed, his voice hoarse.
“But boss, even so... do we have enough money in our accounts to cover the margin calls?”
Someone asked, their voice trembling.
“I’ve already reported the money issue to the board! They need to borrow funds immediately to tide us over! It’s an absolute emergency, we have to deal with it first! The board has also given orders that we must close out all the sold options at all costs, before prices skyrocket!! Regardless of price! Quickly!!”
Initially, when the stock market crash triggered industry turmoil, the main panic was concentrated in the stock market.
While the derivatives market was also affected, it remained relatively calm overall, with some even adopting a detached, detached attitude.
Who could have imagined that this financial tsunami would strike so suddenly? One second it seemed like a distant storm, the next a colossal wave crashed right at their doorstep, instantly engulfing the entire market in a sea of ​​panic!
Now, these institutions deeply entrenched in the crisis are like houses suddenly flooded, desperately trying to baile water out with basins to save themselves, but the problem is…
The water isn't decreasing; it's rising even higher!
And what's worse…
“Damn it! What’s going on? The order book is overflowing with buy orders for liquidation, piled up like mountains, but not a single one is willing to sell? How many times do these bastards want to make before they stop?”
The CEO stared at the long string of buy orders and the empty sell orders on the trading screen, trembling with rage, and slammed his fist on the table.
Ten times! A full ten times the profit!
However, the mysterious buyer, who had swept up almost all the available options contracts on the market like a ghost, held onto these hot potato "death warrants" tightly, like a greedy mythical creature that only took in and never gave out!
He refused to budge an inch!
This completely locked up the already scarce supply in the market, forcing prices to continue their meteoric rise without any resistance!
At this rate, a tenfold, twentyfold, thirtyfold… even a hundredfold increase is not impossible!
“Damn, that’s ruthless! Who is it? Which blind bastard is behind this? Are they deliberately trying to drive us to our deaths, to play us to death?”
The CEO’s voice was filled with impotent rage and a barely concealed fear.
***
Fanghuan Investment, Chairman’s Office.
“Last month’s performance was disastrous; it looks like we can’t expect anything this month either. Sigh, what a run of bad luck, not a single day of peace.”
Huang Fengwen, Chairman of Fanghuan Investment, rubbed his throbbing temples, his face etched with exhaustion and dejection.
Liu Zhuo, the managing director standing nearby, quickly spoke up, trying to ease the tension:
"Chairman Huang, you can't say that. Our risk control this time has been quite effective. The losses have been kept within a relatively small range."
"What's the use of good risk control? We still lost money in the end, didn't we? Today alone, I've received so many loss reports from various departments!"
Huang Fengwen was clearly in a bad mood and retorted irritably.
"Uh...that's true..." Liu Zhuo smiled awkwardly, not daring to argue further:
"However, look at the dire situation of the other private equity firms, some are reportedly on the verge of bankruptcy. Compared to them, we're really lucky."
The market has bull and bear markets, ebb and flow—that's an irrefutable truth.
But the problem is, sometimes when a bear market comes, it's like the sky is falling, too sudden and terrifying—that's the most deadly.
"Thankfully, this didn't escalate into a global financial crisis like the Lehman Brothers crisis, otherwise we'd all be starving."
Huang Fengwen said with lingering fear.
"Hey, Chairman Huang, compared to the subprime mortgage crisis of 2008, this is nothing!"
Liu Zhuo echoed, as if transported back to that dark year.
"Back then, options saw crazy price increases of over a hundred times! So many small companies and institutions couldn't withstand it and went out of business."
Recalling the 2008 global subprime mortgage crisis, Liu Zhuo still felt his legs go weak and his back break out in a cold sweat:
"Our company was also overwhelmed by margin calls. In the end, the board members had to mortgage their properties to borrow money from the bank to barely get through the crisis."
Because of that unforgettable lesson, Fanghuan Investment has become extremely cautious about high-risk derivatives like options ever since.
They redesigned the entire risk control system, with the core principle being:
It's better to earn less than to put themselves in a precarious situation where they could be wiped out by a single market downturn.
In the event of a similar extreme market condition again, 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."
“Exactly!” Liu Zhuo nodded, a barely perceptible, somewhat strange smile appearing on his face:
“I heard that many funds and securities firms are going crazy right now, trying everywhere to liquidate their positions but can’t find any counterparties.”
“Oh? How so? Is it because the price is too high?” Huang Fengwen asked casually.
“A price surge is certain, but that’s not the most critical issue. The key is,”
Liu Zhuo lowered his voice, leaning slightly forward, a hint of mystery in his voice:
“Those mysterious buyers who swept up almost all the circulating option contracts before the crash… they absolutely refuse to sell!”
“Refuse to sell?”
“Yes! They’re holding on tightly, refusing to make a move! Occasionally, a tiny few sell orders will surface, but the volume is so small it’s like squeezing toothpaste—a drop in the ocean, possibly even deliberately released to keep short sellers hanging.”
Liu Zhuo’s tone was tinged with excitement:
“The people who actually hold the large positions have been hiding behind the scenes; nobody knows who they are. Now, countless institutions are practically popping their eyes out, frantically trying to find out who has all these deadly ‘death warrants’ in their hands!”
“Wow! That’s interesting. So, there’s definitely inside information behind this?”
Huang Fengwen immediately became interested, his fatigue seemingly dissipating somewhat:
"To be able to buy up all the stock in advance with pinpoint accuracy, and then hold onto it like glue... ruthless! Absolutely ruthless!"
"Yeah. Those sellers are probably living in agony right now, watching helplessly as prices skyrocket, constantly breaking their loss records."
Liu Zhuo's voice carried a hint of schadenfreude:
"They can't even find counterparties to liquidate their positions to save themselves. That feeling... tsk tsk, they're practically bleeding dry."
Huang Fengwen listened, but something felt off.
He glanced suspiciously at Liu Zhuo beside him. From the beginning, this guy had a faint smile on his lips, and that expression...
wasn't it a bit smug, even a little triumphant?
The company's overall performance is under pressure because of this market storm, and this guy can still laugh?
“Hey Lao Liu,” Huang Fengwen finally couldn’t hold back any longer, frowning as he asked,
“What have you been smugly grinning about all this time? What good news are you keeping from me?”
Liu Zhuo’s smile widened, even taking on a hint of slyness:
“Hehe, Chairman Huang, haven’t you considered… who exactly is that ‘mysterious buyer’ who’s turned the entire market upside down, keeping countless short-selling institutions up at night, that guy who’s holding almost all the long options positions?”