I've probably mentioned this theory before, but: stock markets are a bad indicator for predicting nuclear war. If a nuclear exchange happens, stocks go to zero, so the optimal move for a local is to buy any dip caused by nuclear risk. Dead and broke isn't any worse than dead.
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It was, for somewhat complicated reasons: long CDS on AAA-rated tranches of subprime-backed CDOs, but *also long the equity tranches*. Basically the intra-CDO asset correlation was higher than people thought, making 0 defaults and tons of defaults *both* more likely.
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While far-OTM options might have had a higher payoff, I'm not sure there would have been as much liquidity (and if you'd bought in size it might have spooked people), whereas there was enormous demand to take the other sides of both of those trades.
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My spider sense says “I think it’s pits and I think it is puts on something that is in no way bespoke” but a) curious on that intuition and b) wonder what that thing was. (Individual equities? An index?)
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