My Age of Investment

“Holding a short position of $300.25 million in Lehman Brothers and $74.44 million in Bear Stearns…

It holds US$189.56 million from Morgan Stanley and US$198.87 million from Goldman Sachs...

The five major banks, the five major investment banks, plus AIG American International Group, hold a total of US$2.79582 billion in short positions in the 11 largest financial institutions in the United States. "

In a spacious and bright conference room at No. 40 Wall Street Building, Liu Hai stood on the stage and was reporting work to Xia Jingxing using PPTs one after another.

Xia Jingxing seemed to be sitting lazily in the audience, but in fact he was carefully flipping through the stock short position summary report in his hand, which was far more detailed than the one held by Blankfein and Mai Jinheng.

“Goldman Sachs and Morgan Stanley’s investment in subprime mortgages has revealed a lot of risks this time. Goldman Sachs, in particular, reported a profit, and the room for stock price decline should be very limited.

Our next short-selling targets are three other investment banks, Lehman, Bear Stearns and Merrill Lynch.

Investment banks were the first to be exposed to risks last year. Once the impact of the subprime mortgage crisis continues to expand, the banking industry will take over from investment banks, so the banking industry also needs to focus on taking care of it. "

Xia Jingxing raised his head, nodded slightly towards Liu Hai, and slowly said: "We have currently invested nearly 2.8 billion U.S. dollars in these 11 large financial institutions for short selling, and in addition, another 700 million U.S. dollars have been used to short some areas. Banks and specialty financial institutions like Fannie Mae and Freddie Mac.”

Liu Hai said: "Yes, we can only disperse the layout in this way, because the amount of funds we have now is too large. If we invest all of it in Goldman Sachs, we can buy Goldman Sachs directly.

Although small financial institutions are like mosquitoes, their combined numbers are comparable to several large financial institutions. "

"Well done!"

Xia Jingxing said with a smile: "These two unlucky guys, Fannie and Freddie, hold and guarantee more than $6 trillion in mortgage-backed bonds, accounting for half of the U.S. mortgage bond market. It's time to stand up and deliver justice to the American people. ”

Hearing this, Liu Hai couldn't hold it back and burst into laughter.

When he saw Xia Jingxing glance over at him, he hurriedly said seriously: "Yes, that's right, we are doing justice for God! If the Fed cannot handle things that the Fed cannot handle, we, Vision Capital, will take care of it!"

Jiang Ping and Abel both smiled on the sidelines. Short selling is a market behavior, and they did it without any psychological pressure.

Throwing the documents on the table casually, Xia Jingxing said: "The total short position is only 3.5 billion US dollars, which is a bit small!"

Liu Hai replied: “I dare not short-sell too many underlying stocks at once, for fear of causing drastic fluctuations in stock prices, which will not only alert the short-sold company, but may also easily affect the final short-selling profits.

However, Goldman Sachs and Morgan Stanley have recently been heavily helping us broker some "put" trades.

I think we can try to short-sell later by buying a large number of put options. "

Xia Jingxing nodded slightly. The options here are different from those of startup companies. They are circulated in the secondary market.

As a financial derivative, options are divided into call and put options. At the same time, because they involve buyers and sellers, they are divided into four trading strategies:

Buy a put option and sell a put option to the counterparty;

Buying a call option corresponds to selling a call option to the counterparty.

"I heard that Old Man Ba ​​has also been playing options recently. Doesn't he hate financial innovation?"

As soon as Xia Jingxing finished speaking, Abel answered: "That old man is different from what he looks like. Recently, Berkshire Hathaway has been selling a large number of bearish contracts on the S\u0026P 500 Index."

Xia Jingxing's heart moved, "How long is the deadline?"

"Boss, don't worry about it. I've inquired about contracts ranging from 15 to 20 years. Except for long-term funds such as pension and retirement funds, no institution will buy such a long-term contract."

Abel shrugged, and then introduced: "But Buffett played a good game back then, and he was definitely a master of options.

In April 1993, when Coca-Cola's stock price was hovering around $40, Buffett sold 5 million put options that expired in December of that year and had an exercise price of $35 at a price of $1.50.

In the end, Coca-Cola's stock price fluctuated around US$40-45 throughout the year, and the lowest did not fall below US$35.

So no one is willing to exercise the put option and sell Coca-Cola stock to Buffett for $35.

The option was immediately voided, and Buffett effortlessly earned the $7.5 million in option premium income. "

If Xia Jingxing had some enlightenment, he guessed that Buffett's main purpose was not simply to earn an option fee, but that he thought Coca-Cola's stock price was a bit expensive and wanted to buy it at the psychologically expected price of $35.

Although the purchase was not successful in the end, I also received an option premium as consolation.

The risk point of the entire transaction is that if Coca-Cola's stock price falls below $35, for example, to $25, the counterparty will definitely exercise the option at this time, and Buffett can only tearfully buy the option at a price of $10 higher than the market price. The agreed execution price was $35 and 5 million shares were purchased, resulting in a direct loss of $50 million.

The US$7.5 million in option fees does not need to be refunded and can be slightly offset against the loss, but it still resulted in a loss of more than US$40 million.

However, it is obvious that Buffett is very confident in Coca-Cola's stock price judgment and is optimistic about its later stock price trend, so he dared to sell put options.

In the same way, institutions that dare to sell put options on financial institutions such as Lehman Brothers and Bear Stearns are definitely a sign of confidence in these companies.

It's just that life at the major investment banks is not going very well right now, and I'm afraid they can't find such a tough guy to be their rival.

Xia Jingxing expressed these thoughts.

After listening, Liu Hai frowned, "That's right, but we can set the option execution price lower!

For example, Goldman Sachs, the company's current stock price is nearly $200. Although they have a bad reputation, and there are even voices saying that they will be investigated and prosecuted, their financial situation is good and they have the best fundamentals among the five major investment banks.

What do you say we set the option strike price to $100? Can we attract a group of counterparties to sell us some put options?

If the option premium is $20, this cost must also be taken into account.

In other words, Goldman Sachs’ stock price has to fall below $80 before we can make a profit.

Comparing the current stock price of Goldman Sachs, we need to achieve a 60% decline in order to win.

Is this attractive enough? In the eyes of most people, they should have a greater chance of winning. "

Xia Jingxing thought about it carefully. In fact, this was also a kind of gambling, betting on the stock price expectations.

Whoever has a better and more accurate vision is the winner.

Jiang Ping couldn't help but said: "Isn't it too risky? Goldman Sachs has already cleared part of its risk, and the possibility of another 60% drop is slim."

Liu Hai smiled and said, "I'm just giving you an example. Don't take it seriously. When it comes to derivatives pricing, you will definitely need to go through various formula calculations."

Xia Jingxing thought silently on the sidelines. If you play the options well, you can make more money than directly shorting the underlying stocks.

But the risk is very high. Ninety percent of buying put options is a gift. To put it bluntly, it is speculation, just like buying a lottery ticket.

However, there are not exceptions. When faced with a once-in-a-century opportunity like the subprime mortgage crisis, many counterparty formulas, calculations, and analyzes will all become invalid.

"You can give it a try with some funds, but you have to show me the final plan."

Seeing that Xia Jingxing agreed, Liu Hai looked very happy: "I must show it to you. You are the true god who predicted the subprime mortgage crisis. You can tell at a glance whether the option execution price is reasonable and whether the probability of winning is high or not."

Xia Jingxing laughed loudly, "You think I'm a god."

Liu Hai smiled and said nothing, because he really felt that Xia Jingxing was about to reach the altar in his mind.

Xia Jingxing was not very sure about realizing profits through put options, because to succeed, he needed to judge the time, execution price and many other conditions.

But he still remembers the time when Lehman Brothers collapsed, and he also remembers the share prices of several stocks falling to $1.