Chapter 7 from 10 Disasters That Ruined Smart People
Victor Niederhoffer: Pennies and a Steamroller
On October 27, 1997, the Dow Jones Industrial Average fell 554 points, about 7.2 percent, and trading was halted early. By the end of the episode, one of the most successful hedge fund managers in America had lost his firm.61
Victor Niederhoffer seemed to win at everything. He graduated from Harvard, won the U.S. Open squash championship, and earned a Ph.D. in economics from the University of Chicago. For years he was considered one of the most successful money managers in the country.62
His strategy in 1997 involved selling options, specifically put options. To understand his loss, it helps to understand what a put option is.
A put option generally gives its buyer the right to benefit when an asset falls below an agreed price, called the strike price, before or at a specified expiration. Puts on individual stocks can involve selling shares at the strike price. Options on a stock index, such as the S&P 500, typically settle the difference in cash rather than by delivering shares. Either way, a buyer can use a put to protect against a decline. The buyer pays a fee called the premium for that protection.
The rest of this chapter is in the complete book.
It continues with the mechanism behind the loss and ends with The Pattern, plus the sources for every claim.
Notes and sources
- U.S. Securities and Exchange Commission, “Trading Analysis of October 27 and 28, 1997,” https:/
/ . The SEC records a Dow decline of 554.26 points, or 7.18%, on October 27. ↩www. sec. gov/ news/ studies/ tradrep. htm - Malcolm Gladwell, “Blowing Up,” The New Yorker, April 22 and 29, 2002. ↩
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