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1987 Crash
Reflections of Lessons Learned
 

 

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 I've been trading for more than 30 years, it's been a long time since the 1987 Crash. Many traders have asked for my story, so here it is...

I began trading options soon after they were "catching on". This was around 1982, and I dabbled in stock options until the S&P 100 (OEX) got going. The market was enjoying “good times” for the seven years leading into the 1987 Crash.

The 1980's were a mini-mania, and like going in to the 2000 bubble top, it was easy money for a while... As a trader, I was just beginning to feel invincible. “Just buy a dip, they always go back up” was the theme most believed then.

The “pack-rat” in me, or just for nostalgia's sake, I stuffed away a lot of old trade tickets that occurred around the time of the 1987 Crash. A few months ago, I dug some out for illustration.

On 8/6/87, I buy 10 OEX 315 call options at 6 1/2, which costs $6,500, and I pay $139.60 commissions... for a total net cost of $6,639.60.

 

 

Just 7 calendar days later, on 8/13/87, I closed the position, selling all 10 OEX 315 call options at 18 1/2.... that equaled $18,500, less 254.80 in commission and a .62 SEC fee. The total net proceeds from the sale were $18,244.58.

 

 

My "investment" of $6639.60 turned into $18244.58, giving a quick $11,604.98 profit. In percentage terms, that was about 175% return... in just 7 days!!! And at that time, I thought I was boy genius... little did I know....

That trade was closed near the August 1987 highs... October 19th wasn't far away.... "Black Monday"....

The market was getting “jittery” as we moved into the autumn months. The market had topped in August, and suddenly things weren’t so rosy. One trade that I’ll never forget was entered in early October, shortly before the 1987 Crash. With the market having already dropped off of the August high, the bounce back gave me the feeling that the market should “correct” one more time.

After all, the indicators I kept (mostly done with a calculator and pencil) were very overbought. The charts that I drew with a pencil and paper, strung across 18 feet of wall space, were giving sell signals. I could profit from a sell-off by buying OEX Put options.

I couldn’t find the old ticket for the next trade, but I bought 10 OEX Put options in early October. On Friday, October 16th, the last trading day before the 1987 Crash, market sold off pretty hard – and I closed the OEX put position… I was very happy on Friday, thinking that I might have covered at a market bottom!

 

That feeling was gone on Sunday morning. The Friday sell off had shaken up a lot of those used to the “easy money” on the way up. The Sunday morning Talk shows were all about the Stock Market. I thought, “uh oh.”

It’s Monday morning, October 19, 1987, the day of the “1987 Crash.” “Boy Genius” woke up to FNN (the old Financial News Network) and the anchor man was nervous. Our market was going to open a LOT lower. With just a ticker tape to trade off of, and needing to phone in orders to a broker, I decided not to do anything but watch. I quickly had my VCR tape rewound, and I began taping FNN “just in case.”

That day, watching FNN on TV, was pure chaos. They weren’t sure if the ticker tape was accurate, or as much as an hour behind. I tried to capture the Hourly close on the OEX to keep my charts updated, and that became almost guesswork. I can remember thinking that I just threw away a winning lottery ticket, I could have just cried.

At the close, the Dow lost 508 points. Black Monday, the 1987 Crash, was finally over. That was a whopping 22.5% drop for the day. For comparison sake, as this is being written, the Dow is at roughly 105000. A 22.5% drop would mean a Crash down to 8137 – or a one day loss off 2364 points!!

 

 

Back in those days, I plotted prices on paper charts.
Above is one of my charts of the price action shortly before the 1987 Crash.

The day after the 1987 Crash, the market rallied back. It was a very big up day, and time to buy some OEX Put options for a test of the crash lows. A 10 point drop on the OEX allowed me to lock in a big profit… BUT, I insisted that the market go lower. It didn’t. I was in the process of making my biggest trading mistake. I essentially doubled-up on my bearish “bet” with no regard to the risk side of the equation. To make a long story short, $10,000 in profit not only evaporated, I ended up losing about $10,000 on the trade!

It's been almost 28 years since the 1987 Crash, and over the past 28 years I've made it my life's work to study and analyze the stock market. I've gained a wealth of knowledge and experience that has allowed me to make a living doing what I love the most...trading.

Here are the three main things learned from the period around the 1987 Crash:

 

NEVER confuse brains for a bull market. Learn to play both sides of the market. In the years leading into the 1987 Crash, it was a one-way street on the upside. The rising tide lifted almost all the boats. BUT, when it came to an end, the 1987 Crash was a wake up call. Money can be made on the downside, and sometimes a lot faster. Be flexible enough to play both the up and down moves.

NEVER enter any trade without an “escape plan.” That should be a stop-loss order, or at worst a mental stop that you will obey. And, NEVER let a nice “winner” turn into a loser.

NEVER be dogmatic, thinking the market MUST do what your analysis says it should do. The market can do whatever it likes, it doesn’t care what you or I think it should do. When the market doesn’t act in accordance with your work, and you are in a trade, close it out and take a fresh look. It will save you money and aggravation, and set you free to go on to the next trade.

Since 1996 I've been writing the RBI Trader's Updates. It's a nightly newsletter that has my trading plan for the next day with my support and resistance numbers. My numbers are extremely accurate, and are followed by floor traders, hedge fund managers, day traders, and professional traders who all share the same passion for the market as I have. Sign Up Now and see for yourself!

 

 

 

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Day Trading Advise: Identifying and Exiting Losers
The Benefit of Support and Resistance Trading

Trading Tips

Day Trading Psychology
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Emini Trading Tips

Stock Trading Strategies

1987 Crash
Advice on Day Trading

Day Trading The Emini

Stock Market Day Trading
Emini Day Trading

 

TradeStalker.com, Investment Advisory Service, Fort Wayne, IN

 

 


Disclaimer:
The financial markets are risky. Investing is risky. Past performance does not guarantee future performance. The foregoing has been prepared solely for informational purposes and is not a solicitation, or an offer to buy or sell any security. Opinions are based on historical research and data believed reliable, but there is no guarantee that future results will be profitable.

We are not advocating trading futures. The prices and contracts in the TradeStalker's RBI Updates specify a manner in which you could trade. We occasionally mention the SP500 and Nasdaq futures markets because it is extremely liquid and tends to lead the other markets. This is not an endorsement or recommendation of the SP500 and Nasdaq futures markets. The risk of loss in futures is substantial. You can lose more than your original investment. We are not Registered Investment Advisors or Commodity Trading Advisors.


 

 

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