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My Recollections, as a Trader, of the Crash of ‘87

By Lawrence G. McMillan

Stocks had been declining somewhat since mid-August 1987. The week of October 12-16, 1987, saw an “up” day on Tuesday, October 13th, but then three successive down days, through the rest of the week. Friday, October 16th, 1987, was an expiration day (back then, the 3rd Friday was the only monthly expiration for listed options). The Dow closed down 110 that day – the worst decline, in points, in its history.

Over the weekend, the situation got worse Sunday night in Japan, where markets fell sharply, so on Monday morning, S&P futures opened down about 20 points, from roughly 280 to 260. That was a huge decline, but prices stabilized there throughout the morning. Many traders were trying to buy them for a potential oversold rally, but it just couldn’t materialize.

Then slightly after noon, prices fell to a new low on the day, and just kept on going down for the rest of the day. Eventually, SPX closed at 224, down 20% on the day. The Dow was down 22%. Overnight, recently-appointed Fed Chairman Alan Greenspan opened the moneyspigots, and the Dow gapped about 200 points higher on the opening on Tuesday, October 20th However, that gain started to erode pretty quickly and by mid-morning, it was completely gone. As prices went negative, many specialists closed their stocks because of order imbalance. There was an eerie silence in the trading room. Eventually, the entire NYSE closed for about 20 or 30 minutes. The intent was to find a price, or prices, where stability could allow for market-making once again.

When the market reopened, there was suddenly a huge buy order in the XMI Index (the American Stock Exchange’s index – similar to the Dow – which had futures and options listed on it). Markets roared higher. The Dow closed up that day 103 points, or 5.9%. The rumor always was that the Plunge Protection Team (i.e., the Government) had initiated that sudden buy order that turned things around. That has never been verified.

The next day, October 21st, the market rallied even more, with the Dow gaining 10.1%! Eventually, there were a couple of retests of the closing lows of October 19th, but never of that intraday low on October 20th, 1987. The first retest was just about a week later, and then there was one in very early December.

Volatility

There was no $VIX Index in those days, although the CBOE eventually did go back and calculate where it thought $VIX would have been. $VIX would have spiked to 150 or so on October 19th, up from 36 the Friday before. according to the CBOE, and it remained extremely high . $VIX remained above 100, for the most part, for the next 6 trading days. Put prices were insane, but many risk managers had shut down the market makers and trading desks, so there wasn’t much liquidity. $VIX began to decline after that, but remained in the 40's or higher for the next two months. Option selling strategies would have worked very well from November 1st onward, but most were too afraid of another crash to even consider them.

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