dkrc Chapter 403 Profiting from Short Positions
Chapter 403 Profiting from Short Positions
At nine o'clock in the morning, the Nasdaq Stock Exchange was not yet open. But a burnt smell still lingered in the air of Lower Manhattan, blowing in from the World Trade Center, and it hadn't dissipated even after a week.
Sophia sat at her trading desk in her San Francisco office, facing six screens arranged in three rows and two columns. The two on the left displayed Dow Jones and S&P 500 futures quotes, the two in the middle displayed Nasdaq futures and the VIX volatility index, and the two on the right displayed news and the order book system. She wore a black turtleneck sweater, her hair tied in a ponytail, and the coffee beside her had gone cold, but she hadn't had time to drink it.
The trader next to me, Davis, was in his early thirties, balding, and wore thick glasses. He stared at the screen, his fingers hovering over the keyboard, not falling. He asked, "Sophia, the market's opened. Are you still holding your short positions?"
Sofia didn't answer; she stared at the Nasdaq futures quotes. Trading had begun fifteen minutes before the market opened. Nasdaq futures jumped from 2200 points to 1900 points, a drop of 13%. Trading volume was high; sell orders came one after another, but no one was buying.
The stock market officially opened at 9:30 a.m.
Lines of numbers flashed across the screen. The Dow Jones Industrial Average opened down over 700 points, a drop of 7.13%. The S&P 500 fell 4.92%. The Nasdaq fell 6.38%. Sophia's fingers finally landed on the keyboard. She suddenly pulled up the implied volatility curve for options and found that the VIX was soaring at a rate of 12 points per minute. Davis's Adam's apple bobbed: "Has the circuit breaker been triggered?" Before he could finish speaking, an exchange announcement pop-up covered the entire screen: the S&P 500 index had fallen by 7%, and trading in the US stock market was suspended for 15 minutes.
Davis whistled. "My God."
Sophia stared at the Nasdaq chart. A huge red bar plummeted from the opening price, without any rebound. Trading volume tripled, with sell orders flooding in and no buyers to absorb them.
All six screens in front of Sophia were lit, displaying constantly fluctuating data. She held a pen in her hand, the tip tapping on the table. Davis stood beside her, his eyes bloodshot, the top two buttons of his shirt undone, and the veins on his neck bulging.
"Sophia, your short position is already more than three times profitable. Should you hold on?"
Sofia didn't answer. She glanced at the clock on the wall; it was one o'clock in the afternoon. There were two hours left before the market closed. She picked up the phone and dialed a number. It rang three or four times before being answered.
"Mr. Ling, it's Friday. Should we close out our short positions?"
There was a two-second silence on the other end of the phone. "Clear. Clear all positions, then reverse and go long."
Sofia paused for a moment, then said, "Okay."
She hung up the phone and looked at Davis. "Clear all short positions, at market price. After that, open long positions. Futures, options, and individual stocks, according to our previously agreed proportions: futures 20%, options 10%, and individual stocks 70%."
Davis froze, his hands hovering over the keyboard. He stared at Sophia, mouth agape. "Sophia, can't you see the market sentiment right now? The fear index is still rising, the VIX is already at fifty. Everyone's selling, nobody's buying. Are you going long now?"
Sofia looked at him and said, "Clear out short positions and open long positions."
Davis didn't move, and another trader next to him turned to look at Sofia. The man said, "Sophia, this is no joke. Going long now could mean losing ten percent in a single day. Ten percent, that's hundreds of millions. Who's responsible for that loss?"
Sofia said, "Execute the order, close out short positions, and open long positions."
Davis gritted his teeth, turned around, and began typing. His hands were trembling, not from fear, but from nervousness. He typed a line of commands and pressed Enter. A confirmation box popped up on the screen, and he clicked confirm. Sell orders were placed, one after another. Buy orders to close short positions were instantly absorbed, and the transaction reports popped up one after another.
"Short position closed, Nasdaq futures, 1,200 lots, average transaction price 1,820 points. Unrealized profit of 340%."
"Short position closed, put options, 30,000 lots, average transaction price... unrealized profit..."
"Short positions closed, individual stocks..."
The sounds rose and fell, and after a dozen minutes, all the short positions were cleared. The account balance in front of Sophia jumped from 220 billion to 380 billion. A profit of 160 billion in just one week.
Davis let out a long sigh and leaned back in his chair. He wiped the sweat from his brow; his palms were drenched. "All cleared. Now, should we open a long position?"
Sofia said, "Initiate a position: 2,000 lots of Nasdaq futures, buy at the current price."
Davis's hands stopped again. He looked at the Nasdaq futures price: 1810 points, down 5% from the opening. The sell orders were still pouring in, showing no signs of stopping. He turned to Sophia. "Two thousand lots? Now?"
Sofia said, "Now."
Davis took a deep breath, turned back, and started typing. He entered the command and confirmed. A buy order was placed—a large order of 2,000 lots appeared on the order book. Sell orders were placed, but were absorbed. More sell orders were placed, and absorbed again. The price didn't fall; it stabilized. Then it started to rise: 1815, 1820, 1830.
Davis's eyes widened. "Someone's following us."
Sofia looked at the screen, her fingers tapping lightly on the table.
The market closed at 3 PM. The Nasdaq Composite Index closed at 1850 points, up 40 points from the opening. Although it was still down from the previous day's closing price, it rebounded during the day. Trading volume was enormous, three times the usual amount.
Davis looked at the closing price and breathed a sigh of relief. "All done. Two thousand contracts of Nasdaq futures, average price $1825. Twenty thousand contracts of call options, strike price 2000 points, three-month term. Individual stocks: bought two million shares each of Intel, Microsoft, and Cisco. Total position: sixty percent."
Sofia nodded.
The market will open on Monday.
The Nasdaq opened sharply higher at 1890 points, up 40 points. Futures prices rose pre-market and continued to climb after the opening bell. It closed at 1950 points, up 5.4%. Long positions began to generate profits.
On Tuesday, it rose 2.1 percent.
On Wednesday, it rose by 1.8%.
On Thursday, it rose 3.2 percent.
On Friday, it rose 2.5 percent.
Over the course of a week, the Nasdaq rose from 1850 points to 2100 points, an increase of 13.5%, resulting in a 30% unrealized profit for long positions.
Davis sat at the trading desk, watching his account balance jump from 380 billion to 490 billion. He rubbed his eyes and looked at it again. He turned to Sophia. "How did you know?"
Sophia didn't answer. She picked up the phone and dialed Ling Yun's number. "Mr. Ling, as per your instructions, the long positions are complete. It's up 30% this week. Unrealized profit is 30%. Account balance is 49 billion. What's the next step? Should we take profits?"
The person on the other end of the phone said, "Take it, keep it until the end of December, and then report back to me."
Sofia said, "Okay."
She hung up the phone and looked at Davis. Davis looked at her too. Davis said, "Sophia, I give up. Not you, but the boss. How did he know?"
Sofia said, "Don't ask questions you shouldn't ask."
Davis turned back to the screen. He typed a line of code, bringing up a chart showing the Nasdaq's performance over the past month. He zoomed in, looking at the curve that had started to fall in early September and rebounded at the end of September. He stared at it for a moment, shook his head, and closed it. He picked up his water glass, took a sip, and put it down. Then he started typing, preparing his trading plan for next week.
Sofia opened her notebook and wrote a line in pencil: "September 17th, clear out, go long. September 28th, account 49 billion." She closed the notebook and put it in her pocket. Then she picked up the phone and began to plan her work for the following week.