My Age of Investment

  Chapter 1055 Be careful with short sellers

  In the following week, Bear Stearns' stock price trend entered a see-saw period.

  Sell the long position to stop the loss, and buy the short position to close the position.

  Under the deliberate control of the bears, the forces of both sides have remained evenly matched.

  The closing price on March 17 was US$4.81;

  The closing price on March 18 was US$5.91;

  ……

   Seeing that Bear Stearns’ stock price gradually could not fall anymore, and there was a slight increase, the panic of investors gradually returned to stability, and they began to hold back their tickets and reluctantly sell.

  In this case, the tacit understanding between various shorts began to be broken, because no one wanted to be left behind, resulting in more liquidation costs and reduced profits.

  I don’t know which institution that doesn’t care about military ethics has taken a large sell order at a price of just over $10, which is the prelude to the fight between the shorts and the shorts.

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

According to the revised terms, each share of Bear Stearns’ ordinary shares will be converted into 0.21753 shares of JP Morgan ordinary shares, which is about 4 times higher than the 0.05473 shares before the revision. According to JP Morgan’s stock price conversion, the new plan will affect Bear Stearns. The offer price of the company was raised to $10.

  At this moment, the short positions that have not been fully liquidated began to panic, especially those short-term shorts that rushed in because of the announcement of the acquisition news. They were the most panicked because their short position was only a dozen dollars.

  The announcement of the new plan has completely lost their "safety mat". If they want to close their positions, they have to pay a certain price!

  JP Morgan and Bear Stearns seemed to not want to let go of these shorts, and the good news was released one by one.

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

  Next, the Federal Reserve Bank of New York announced that it would take over and control Bear Stearns’ portfolio of assets worth 30 billion U.S. dollars to facilitate the acquisition of JP Morgan. Any profits and losses arising from these assets will be borne by them.

  Bear Stearns’ assets have been impaired several times, and this move by the Reserve Bank of New York is equivalent to stripping off the remaining subprime debt assets held by Bear Stearns.

  After a fierce operation, Bear Stearns emptied himself, rushing to run away, and if they didn't run away, they were buried in it.

  In this case, Bear Stearns’ stock price ushered in a surge, first breaking through US$20 and then US$30.

  The short position was blown out and liquidated, which became the fuel for the stock price to rise, which in turn boosted the rise of Bear Stearns' stock price.

  There are not many underlying stocks of Vision Capital short-selling, and the liquidation was completed a few days before JP Morgan and Bear Stearns announced the revised acquisition agreement.

  Then they went long backhand and joined the army of crusade against shorts together!

  …………

  …………

   "Good job!"

  In the office, Xia Jingxing flicked the file in her hand with joy, and listed the profit and loss of the short-selling against Bear Stearns in detail.

   short-sell 4.28 million underlying stocks at an average price of $74.44 and liquidate the position at an average price of $7.58. A total of $318.6 million was invested and a total profit of $28615 million was obtained. The return on investment reached 89.8%.

This is a very high rate of return, because shorting is different from longing. Longing can be several times or tens of times more profitable. Shorting up to 99.99%...The rate of return is infinitely close to 1, but it can never reach 1.

  Considering that the two major investment banks have added three times the leverage, this rate of return can actually be three times higher than the invested principal.

  Compared with investing more than US$300 million to short the underlying stocks, the 5 million put options purchased with a premium of US$3.5 million undoubtedly brought even greater surprises!

  The value has increased by nearly 33 times!

  After the liquidation, a total of 115 million U.S. dollars were sold. After deducting the 3.5 million U.S. dollars invested in principal, the actual profit was 111.5 million U.S. dollars.

  Together, Envision Capital spent less than US$320 million on Bear Stearns, and its total profit reached US$39765 million, which is nearly US$400 million.

  "It’s still a bit regretful. Put options should be bought more. They account for a little over 1% of the total investment in Bear Stearns, and less than 2%."

   Liu Haihai said and shook his head, looking annoyed.

  Xia Jingxing sneered, "Okay, let alone these useless, do you know how hard it took Goldman Sachs and Morgan Stanley to help us match these 5 million options? Are there so many counterparties?"

Liu Hai nodded and said: "This is also true. Options are not comparable to underlying stocks. The underlying stocks actually exist. They only need to be borrowed from major investment banks and investors to sell. Put options are actually a gambling agreement. Someone is willing to gamble with you."

  Xia Jingxing nodded slightly. Of course, he knew that option investment is more profitable, but this thing has no upper limit for ordinary investors. For a large-scale fund such as Vision Capital, it is really difficult to find one or more rival institutions to accompany you.

   Therefore, when the amount of funds is too large, it can usually only be used as an auxiliary investment tool, with a small amount of allocation 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 long/short underlying stocks, and then allocate a few percent of put/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 are completely opposite to Vision Capital. This is to prevent the occurrence of a black swan event that causes floating losses in the allocation of large assets.

  If the stock price plummets according to this configuration, most of the fund’s assets are allocated in long positions and it will become a lot of 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    can fully cover the risk exposure of the fund depends on the sophistication of each fund model and investment portfolio. This is also the origin of the name of the hedge fund, which means hedging risks.

  However, Vision Capital is fully bearish, and without all these fancy tricks, it belongs to a net short position. This operation has only two results, a big loss or a big profit.

  "How about the index?"

  Xia Jingxing turned his attention to Jiang Ping. The other party led the team to be responsible for the futures, options and related derivatives transactions of the three major U.S. indexes. Corresponding to Liu Hai’s responsibility for short stocks and options, they all have US$20 billion in funds.

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

  "In the follow-up, our department added another 40,000 orders. At present, a total of 100,000 futures forward contracts have been short-sold at the S&P 500 index at 1,400 points.

  The trading account has formed a short position of US$35 billion on the basis of a US$7 billion trading margin. It still maintains the previous 10 times leverage, and another half of the margin has not been used.

  Today the S&P 500 index closed at 1352.99 points, and we still have a floating profit of almost 47 points.

  One point fluctuation profit and loss is 250 USD, and then multiplied by the number of 100,000 futures contracts, the total floating profit is 1.175 billion USD! "

  Xia Jingxing frowned and said: "I remember that there were more than $3 billion floating in the S&P futures contract a few days ago? Did I remember it wrong?"

Jiang Ping smiled ashamed, "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&P index rose by 54 points, a single-day increase of 5.24%, so it is straightforward. Smoothed out our profits for nearly two months."

   In Xia Jingxing's mind, it is impossible to accurately grasp the trend of major subprime companies and major financial products in the number of days. It is already the limit to remember that Bear Stearns was acquired in March.

  In this situation Jiang Ping said, he really can't help and give guidance.

  "The Nasdaq and the Dow, we also invested 3.5 billion US dollars each, established short positions of 17.5 billion US dollars, and both maintain a small profit.

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

  Speaking of this, Jiang Ping's conversation changed, "However, we still have to be careful, because there has been a gust of wind in the market recently that the acquisition of Bear Stearns indicates that the subprime mortgage risk has come to an end."

  Xia Jingxing smiled and said, "How much do you drink? Say this."

Liu Hai interjected: "It was not said by an anonymous person, but by a report released by Standard & Poor's. They said that most of the asset impairments of major financial institutions due to the subprime mortgage crisis have already appeared. Next It's the moment of bottoming out."

   Abel added: “They also said that let short sellers be careful, the next few months will be like purgatory torture.”

  Xia Jingxing was silent, he was carefully thinking about the trend of US stocks.

  It seems that US stocks often break out of financial crises of different scales, but in fact they have very strong vitality, and they can always last a year and a half before the collapse.

  Take the Internet bubble in 2000 as an example. In fact, it appeared in 1999, and it was already in 2002 when it bottomed out.

  (End of this chapter)