Making Millions In The Market 1987 Crash!
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My Journey and Lessons from the 1987 Market Meltdown
Reflections of a Stock Option Trader During the 1987 Crash
Henry Jennings | 17 October 2024 | Articles
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37 Years! Where Has That Gone!
I started as a back-office clerk in the UK before transitioning to a trainee dealer role on the floor of the London Stock Exchange. It didn’t take long to discover that I had a knack for it and developed a passion for the market. The early 80s brought significant changes under Thatcher, including the Big Bang in the City. These changes eventually led to my becoming a member of the London Stock Exchange in 1985 - two years before the crash. By that point, I had already spent eight years gaining experience in the market leading up to that fateful October. I had moved from broking to trading and became a senior option trader on the floor for a company called Smith Brothers, a venerable old Jewish stockjobbing firm. Smith Brothers eventually became Smith New Court and was later bought out by Merrill Lynch. As a senior trader, I was especially skilled at first-day trading in the recently privatised UK companies like Jaguar, British Airways, British Gas, and Rolls Royce. Shouting, screaming, and being quick with arithmetic was my forte, and I loved it..png)
The Calm Before the Storm
We all knew that one day the game would be up and that all the fun we were having would have to be paid for. The piper always takes his wages. And talking of wages, the Big Bang in the City created yuppies. I was a Yuppie. Filofax in hand and even a Motorola Mobile phone. Yes, for those that can remember them they resembled a brick.Building Tension and Optimism in the Market
The Yuppie Boom and Soaring Salaries
So, the game continued. The instos earned extra income and looked very clever in the brave new world and option traders like me took on the risk and bought the stock. Salaries soared as profits rolled in. Privatisation gave everyone a stake in the new stock market bubble. My salary went from GBP1701 to GBP40,000 over that period. 1700 pounds did not even cover my car loan when I started. Didn’t even cover my season ticket so I worked for my father during the holidays on building sites and weekends to earn enough to eat and play in the City. With the increase in our salaries came a belief that we were invincible. We were early 20s and Masters of the Universe. All that was to end..png)
The Dutch Connection
At that time there were a lot of international traders in the London Traded Option Market (LTOM). The Dutch were there in force and I was pretty tight with my Dutch friends. They liked to party and had huge expense accounts to boot plus they knew options. They practically invented them. Think tulips. Anyway, the Friday before the Black Monday crash I was in Amsterdam having flown through the Hurricane that hit London the night before. Needless to say, I had a fabulous weekend in a great city with some lovely people. Sunday night I flew home and knew that we were in for a serious week. The market had been closed on the Friday as people struggled to work and tried to get through the physical carnage that had hit London.The Crash Begins
So, there we were at Smith Bros, a bunch of young traders who owned all the puts. A lot of them were October puts (if the crash had happened week later things would have been different). We had a huge equity trading operation. It was not a big firm and the company was long. Seriously long going into the crash. With the new computerised trading that had just been brought in adding to the complications. After some crisis meetings, we were ready to take the floor like gladiators entering the arena. We knew it would be make or break for the company. And so, it began. The falls were mind numbing. We did not have computers in those days, so it was impossible to make prices on options and know your positions from minute to minute. The only thing we knew was that we were all very short. As prices plunged through the strike prices were got shorter and shorter. We had to buy stock to re-hedge our delta exposure and buy lots of it. You would think that buying stock would be easy in a crash. Just stand there with a buy pad and write out the slips. No such luck. Under our company rules we were only allowed to trade with our own equity market makers. So, a phone call, yes, they were phone calls, to the dealing desk in equities to buy 1m Rolls Royce shares was followed with a short sharp two-word sentence one of which was 'off'. We could not buy enough stock to cover our shorts. The equity market makers did not have the capacity to sell as much as we wanted and believed that a rally was imminent and there was no value in selling a spotty option trader 1 million Rolls Royce at the bottom. Of course, it turned out that it wasn’t the bottom. FTSE 100 fell by 10.8% on Black Monday itself, and 12.2% on the following day.Profiting in the Panic
We made millions that week. Puts that were worthless were suddenly worth fortunes, everybody was buying puts to cover or we were buying as much stock as we could to hedge our position. It was frantic. I lost my voice and couldn’t talk properly for the following week. Fortunes were made and lost that week and as usual we washed them down with the yuppie drink of choice, Bollinger. We were heroes. Just for one day. When the option trading team finished the first day, we walked up to the equity trading floor (remember it had all gone electronic by then) and were given a standing ovation. It was like winning the world cup. We walked amongst our peers swapping war stories and offer congratulations and sympathy. The upshot was the option traders had made a profit of GBP9.5m on that day. The rest of the firm had lost GBP9m. Smith Brothers was still in business. We had saved the firm. Bonuses all round.The Calm After the Storm
And so, the week unfolded. Day after day a similar story. My girlfriend at the time was away on business and a nightly phone call really didn’t do it justice. Besides I was usually in the Arbitrageur Bar drinking and dancing on the ceiling. The only problem seemed to be that after the crash, no one else wanted to play anymore. Wounds were being licked. Traders were being let go and the world of the yuppie changed. ‘Wall Street’ came out and we had ‘Bud Fox’ and ‘Gordon Gecko’ to model ourselves on but it wasn’t the same. For the following two years option traders in London came in every day and twiddled their thumbs me included. If someone wanted to trade the competition was so fierce that we also jumped on a buyer or a seller with enthusiasm. After two years of holding out and playing dumb games, I saw an ad in the FT for traders to come and trade options and derivatives in Sydney. My way out. And here I am 35 years later.What Lessons Can Be Learnt from All This?
And how does it relate to the current market? (Updated slightly!) Well, it is pretty fully valued. Complacency is rife and we have some serious irrational behaviour going on. Trump Media But it does not feel like 1987. Things had got really out of control by then. Corporate leverage and balance sheets were stretched to the hilt and takeovers using scrip were rife. Deals were everywhere. Since then, of course we have had other crashes, mini crashes and the mother of all crashes the GFC. What differs from 1987 to 2008 was that the ‘87 crash was confined to the stock market primarily. It really didn’t spill over to the real economy or jobs. It threatened to, but never really did. We had a recession we had to have (some years later) and house prices became the bubble and then crashed. Interest rates went through the roof. In the GFC everything was infected. The banks nearly collapsed and we were on the brink of another great recession. Luckily central banks stepped in and saved the day. Record low interest rates have saved us but have enslaved us through massive household debts. We are paying the price for that currently but house prices remain massively elevated!Final Thoughts
So, will we see another crash? Yes of course we will. History does repeat. Will it be soon? I suspect that is unlikely given the low rates and the lack of alternatives. Will some bubble markets crash? Yes. Chip stocks may crash one day. Who knows? The one lesson that I learnt from that crash, and the subsequent ones, is avoid over leverage and have some cash around for those opportunities. The GFC and other crashes are rare events and when they happen, fortune favours the brave and the market gets irrational and traders throw everything out in the search for liquidity. It will happen again. That is why you must keep a buffer and have cash ready to be deployed to snap up those once in a lifetime opportunities. The investors that got seriously hurt were those that had massive leverage and had to sell at any price. The smart money bought. It is easy in these heady times to throw caution to the wind. Fear of missing out is real. Stick to your plan. Have discipline. Buy quality companies and have funds ready just in case. And finally, don’t believe your own hype. Hubris is a dangerous thing. Pride does come before a fall. Everybody looks good in a full-on bull market but it’s when the tide goes out, that we see who is not wearing any clothes as they say. Incidentally during the crash our index futures trader had a huge punt on the market bouncing and bought back all the short exposure we collectively had. He didn’t tell anyone and hid his trade until Xmas eve. Somewhat of a shock to find a massive multi-million-dollar loss that carried our bonuses down the Thames but that is a whole different story and one for another day..png)
In there somewhere!
- Henry Jennings
Marcus Padley was working at Wood Mackenzie in London at the time of the 1987 crash. The bottom line: Be aware when markets are overbought. Watch the herd, don't join the herd. Watch His Video Here:
