My Age of Investment

Over the next week, Bear Stearns' share price entered a period of tug-of-war.

Long sell to stop loss, short buy to close.

Under the deliberate control of short sellers, the forces of both parties have always remained evenly matched.

The closing price on March 17 was $4.81;

The closing price on March 18 was $5.91;

…

Seeing that Bear Stearns' stock price was gradually declining and rising slightly, investors' panic gradually stabilized and they began to hold back their tickets and hesitate to sell.

In this case, the tacit understanding among the short sellers began to be broken, because no one wanted to fall behind, resulting in more closing costs and reduced profits.

I don’t know which unethical institution took a large sell order at a price of just over 10 US dollars, which started the prelude to the fight between short sellers.

Bear Stearns' stock price began to rise step by step, first exceeding $15, and just when it was about to exceed $20, JP Morgan and Bear Stearns jointly announced a revised acquisition agreement.

According to the terms of the amendment, each share of Bear Stearns' common stock will be exchanged for 0.21753 JP Morgan ordinary shares, which is approximately 4 times higher than the 0.05473 shares before the amendment. Converted according to the stock price of JP Morgan, the new plan will be beneficial to Bear Stearns. The acquisition offer was raised to $10.

At this time, the short sellers who had not completely closed their positions began to panic, especially those who rushed in to short-term short positions because of the announcement of the acquisition. They were the most panicked because their short positions were only more than ten dollars.

The announcement of the new plan completely eliminated their "safety cushion". If they wanted to close their positions, they would have to pay a certain price!

As if JP Morgan and Bear Stearns didn't want to let these short sellers go, they released good news one after another.

First, it announced an equity issuance agreement. JP Morgan will subscribe for 95 million newly issued ordinary shares of Bear Stearns in cash at US$10 per share, supplementing Bear Stearns' cash liquidity by nearly US$1 billion.

Then, the New York Federal Reserve Bank announced that it would take over and control Bear Stearns' asset portfolio worth US$30 billion to facilitate JP Morgan's acquisition, and any profits and losses generated by these assets would be borne by them.

Bear Stearns' assets have been impaired several times, and the New York Reserve Bank's move is equivalent to divesting the remaining subprime debt assets held by Bear Stearns.

With a fierce operation, Bear Stearns took advantage of all the opportunities. The short sellers scrambled to escape. If they didn't escape, they would be buried inside.

Under this circumstance, Bear Stearns' stock price experienced a surge, first exceeding $20 and then $30.

Short sellers were forced to liquidate their positions, which became fuel for the rise in stock prices, which in turn boosted the rise in Bear Stearns' stock prices.

Envision Capital did not short-sell many underlying stocks, and the positions were closed a few days before JP Morgan and Bear Stearns announced the revision of the acquisition agreement.

Then they backhandedly went long and joined the army of crusade against the short sellers!

…………

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"Well done!"

In the office, Xia Jingxing flicked the document in his hand with a face full of joy, which listed the detailed profits and losses of short selling Bear Stearns.

The company short-sold 4.28 million underlying shares at an average price of US$74.44 and closed the position at an average price of US$7.58. A total of US$318.6 million was invested and a total profit of US$286.15 million was achieved, with a return on investment of 89.8%.

This is a very high rate of return, because shorting is different from going long. Going long can earn several times or dozens of times profit, while going short can make up to 99.999%... The rate of return is infinitely close to 1, but can never reach 1.

Considering the triple leverage from the two major investment banks, this rate of return can actually be multiplied three times compared to the principal invested.

Compared with investing more than US$300 million to short the underlying stock, the value of the 5 million put options purchased with a premium of US$3.5 million increased nearly 33 times, and the price was sold for US$115 million, after deducting the investment capital of US$3.5 million. Gold, actual profit was US$111.5 million.

In total, Bear Stearns spent less than US$320 million on Bear Stearns, and the total profit reached US$397.65 million, nearly US$400 million.

"It's still a bit regretful. We should buy more put options, which only account for a little more than 1% of the total investment in Bear Stearns, and less than 2%."

Liu Hai shook his head as he spoke, looking annoyed.

Xia Jingxing sneered, "Okay, don't say these are useless. Do you know how hard Goldman Sachs and Morgan Stanley spent to help us match these 5 million options? Are there so many counterparties?"

Liu Hai nodded and said: "That's true. Options are not as good as the underlying stocks. The underlying stocks actually exist. You just need to borrow them from major investment banks and investors and sell them. The put options are actually a gambling agreement. You need to Only if someone is willing to bet with you."

Xia Jingxing nodded slightly. Of course he knew that option investment was more profitable, but there was no upper limit for this thing for ordinary investors. For a large-scale fund like Vision Capital, it was really not easy to find one or more rival institutions to play with you.

Therefore, when the amount of funds is too large, it can usually only be used as an auxiliary investment tool and a small amount is allocated in the investment portfolio.

As far as he knows, in order to hedge risks, some Wall Street funds like to allocate more than 90% of the long and short stocks, and then allocate a few percent of the stock's put and call options or other high-risk derivatives.

Note that long positions are allocated with put options and short positions are allocated with call options, which is completely opposite to that of Vision Capital. This is to prevent black swan events from causing floating losses in large asset allocations.

If according to this configuration, the stock price plummets, most of the fund's assets will be allocated in the long position, and it will become heavy losses. At this time, a small amount of put options will come into play, and its profits can make up for a certain amount of the overall loss of the fund.

Whether the fund's risk exposure can be fully covered depends on the sophistication of each fund's model and investment portfolio. This is also the origin of the name of hedge funds, which means hedging risks.

However, Vision Capital is completely bearish. Without these fancy techniques, there are only two outcomes, big losses or big profits.

"How about the index?" Xia Jingxing turned his attention to Jiang Ping, who led a team responsible for futures and options trading of the three major U.S. indexes, corresponding to Liu Hai's responsibility for shorting stocks and options.

The only difference is that the financial products Liu Hai's team focuses on trading are stocks and their derivatives, while the financial products Jiang Ping's team focuses on trading are indices and their derivatives.

“We short-sold 100,000 futures contracts at 1,400 points on the S\u0026P 500 Index, forming a short position of US$35 billion based on a margin of US$7 billion, which is equivalent to 5 times leverage, which is higher than the 8 times commonly used by ordinary institutions. -10 times is much safer.

Today the S\u0026P 500 index closed at 1352.99. We still have a floating profit of almost 47 points. The profit and loss of a one-point fluctuation is US$250. Multiplied by the number of 100,000 futures contracts, the total floating profit is US$1.175 billion! "

Xia Jingxing frowned and said, "I remember that there was a profit of more than 3 billion US dollars on the S\u0026P futures contract a few days ago? Did I remember it wrong?"

Jiang Ping smiled, "You remember correctly, a week ago, there were indeed so many floating profits, but two days after JP Morgan announced the acquisition of Bear Stearns, the S\u0026P index rose 54 points, a single-day increase of 5.24%, so directly It wiped out nearly two months of our profits.”

It was impossible for Xia Jingxing to accurately grasp the trends of major subprime mortgage companies and major financial products for more than a few days. He could only remember the acquisition of Bear Stearns in March.

What Jiang Ping said, he really couldn't help give guidance.

“We also invested US$3.5 billion each in the Nasdaq and the Dow, establishing short positions of US$17.5 billion respectively, and both are currently maintaining small profits.

In addition, another US$6 billion was invested in options, ETF funds and volatility derivatives transactions of the three major indexes, all of which also maintained small profits. "

At this point, Jiang Ping changed the topic, "However, we still have to be careful, because there has been a trend in the market recently, saying that the acquisition of Bear Stearns marks the end of the subprime mortgage risk."

Xia Jingxing smiled and said, "How much have you drunk? To say such a thing."

Liu Hai interjected: "It was not said by an unknown person, but by a report released by Standard \u0026 Poor's. They said that most of the asset impairments caused by the subprime mortgage crisis of major financial institutions have already been revealed. What's next? It’s the bottoming out moment.”

Abel added: "They also said short sellers should be careful, the next few months will be hellish."

Xia Jingxing remained silent as he carefully reviewed the trend of the US stock market.

It seems that financial crises of different scales often break out in the U.S. stock market, but in fact it has very strong vitality and can always survive for a year and a half before collapse.

Take the Internet bubble in 2000 as an example. It actually started to appear in 1999, and it was already 2002 when it hit the bottom.