From: blenko-tom@CS.YALE.EDU (Tom M. Blenko)
Subject: Re: Warrents
Reply-To: blenko-tom@cs.yale.edu
Organization: Yale University, Department of Computer Science, New Haven, CT
Distribution: usa
Date: Tue, 17 Nov 1992 05:29:02 GMT


| >I don't get it. Options are insurance policies. Options
| >on options are reinsurance. What is the objection to
| >either, and why shouldn't they be traded as securities?
| 
| Insurance policies?  Maybe if you have something to insure.
| 
| If you bought IBM stock and you wantr to take some insurance against
| their falling, as seems to be their won't, sure, buy the put. Etc.
| 
| But what if you don't have the IBM?
| 
| What if you don't buy the BMW but take out a nice insurance policy
| on one?  

If your retirement funds are invested in IBM stock, you
might well wish to buy a policy that, say, insured you
against it falling below 75% of it's price on the day you
retire. And you'd be willing to trade some of the upside
risk to insure against that downside risk.

Suppose you wanted to do business in Germany. You're an
expert in the software business, but not in exchange
rates. So you'd like to insure yourself against large
fluctuations in the exchange rate, and you're quite
willing to trade the upside risks for the downside risks.
And someone doing business in the opposite direction
might desire just the opposite protection. So the options
market allows you both to do so. Asian options are
designed for precisely this purpose.

Ditto real estate developers locking in rates for
transactions to take place six or twelve months out, or
companies designing executive compensation packages.    

| Or what if you see me coming, and say, Psst!  Wanna buy a real nice
| insurance policy?   Anything happens to that BMW parked out there --
| it's not even mine or yours -- you clean up!
| 
| Or what if you go down to your friendly Allstate agent and say:
| 
| I have this insurance policy on that BMW I don't own, and I'd like
| you to sell me a policy on my policy.
| 
| So, yes, there are specific cases where options provide a degree of
| insurance, but there are all too many cases where they are straight
| gambles. 
|
| If I go out tomorrow and write 20 IBM Feb 75 calls naked, then
| calling the calls "insurance" will not make it so.,

I understand why Bill Clinton would want to take out life
insurance on Bill Clinton. I don't know why you would want
to take out insurance on Bill Clinton. But hey, go right
ahead. And if you're simply gambling rather than buying
insurance, so what (there are certainly insurance
companies that will sell you a Bill Clinton life
insurance policy, and there are even probably people
other than his immediate family who have perfectly sound
reasons to buy one)? That's your problem, maybe it's
easier than taking a drive down to Atlantic City.   

If you are acting as an insurance underwriter and you are
running your business unsoundly, you can expect to go out
of business. That doesn't mean there shouldn't be an
insurance business, it just means you shouldn't be in it!
One of thing good things about options bought and sold on
the existing markets is that there are rather deep pockets
underwriting the whole system, so that your failure will
not hurt me if I bought an option you wrote on one of the
established options markets.

The tenor of these objections seems to be focussed on this
model of options being lottery tickets bought by
individuals in the privacy of their own home, which are
capable of leading to financial devastation and ruin. It
may be that there are such people, and you may be one of
them. But in terms of activity in the markets altogether,
this is pure noise. I'm inclined to agree that this is
probably a very risky game for anyone who is party to this
discussion, and I wouldn't encourage it on anyone.
Nevertheless, on the one hand options do play an
important role in the market, and on the other they are
neither necessary nor sufficient for speculation to
occur in the market, or for individuals to wreak havoc on
their own financial health.      


	Tom
Newsgroups: misc.invest