← AdvancedLesson 13 · 4:42
What happens in a crash?
Summary
You can put a whole book of sold puts through a crash and see the three hits at once: price gaps, volatility tripling and the skew steepening. You can explain what the hedge did on today's line, and why margin calls can arrive at the low.
Key terms
- gap
- A jump in price between one close and the next open, with no trading in between.
- margin call
- A broker's demand to add cash or close positions when the cushion runs out; the broker can close them for you.
- cushion
- The money in your account not yet held as margin, which losses eat into.
- hedge
- A position held to reduce the loss on other positions, such as bought puts under sold ones.
Check yourself
Answer each question to see why the right answer is right.
1. You planned to close if XYZ hit $95. Overnight it gaps lower, and the first trade is $94. What does this show?
2. The three bought $80 puts cost $30 in all. At $80 the last-day line says they are worth nothing, yet today each is worth about $519. Why?
3. Without the hedge the book is down $2,736 at $80. With it, $1,210. Did the hedge save the book?
4. The account holds $8,000. At the bottom, the hedged book's cushion is $452 and the unhedged book's is minus $1,074. What does the unhedged book face?
5. Is a jump to 60% volatility realistic?
Finished the video and the quiz? .