O'Connor still takes a big hit, giving up its gains for what had been a very good year, but it actually makes money on the option portfolio Struve modeled. The firm, a market maker that trades options amounting to almost 5 percent of the daily volume on the New York Stock Exchange, endures a Darwinian moment and lives to trade another day. Our winners helped us lose a half-ton instead of a ton. People in Struve's line of work don't really want to be widely known anyway, since they usually make the news only when they lose several billion dollars, like the lauded economists who launched last year's hedge fund Hindenburg, Long-Term Capital Management. And as his ideas seep into the mainstream, he could yet make the world safe for financial engineering.
Options traders place huge bets on the smallest of movements.
It's a high-stakes game where one's ability to accurately calculate price is everything. But Struve feels it's not comprehensive enough. He starts with Black-Scholes and returns frequently to a chart showing the relative rate of return of stocks and bonds over the last four decades, using tools as mundane as Value Line sheets and press releases to flesh out the numerical picture. At the methodology's core is an understanding of the ways markets tend toward improbable disasters, impelled by the self-referential behavior of investors. Financial engineers have a history of mistaking markets for a rational universe, of looking past the tiny odds of a given cataclysm to the huge streams of cash their models will more likely produce, but Struve seems immune to modelitis.