The 1987 crash taught options markets that unhedged put sales posed systemic risk

Evidence

The moral obloquy arises because the 1987 crash taught the options market that unrestrained, unhedged or inadequately hedged put sales threatened not just the seller but the market as a whole. A collective response to the danger came in two phases. First, options clearing firms themselves changed their riskmanagement practices in response to 1987, for example by starting to check the consequences for each trader who cleared via them of a repetition of the crash (Hinkes interview 2). — Donald MacKenzie, An Engine, Not a Camera, 931

Categorization

• XREF: connects to: The 1987 crash traumatized U.S. derivatives markets in ways absent elsewhere. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 165; Post-1987 option pricing may be rational given the crash’s trauma, not irrational. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 155; The 1987 crash exposed how fragile the options clearing system was to extreme prices. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 164 (+5 more)

Broader Connections

• The 1987 crash ended the Barnesian performativity of classic option-pricing theory #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 942
• The post-1987 volatility skew became a permanent feature of index options #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 901
• Explaining post-1987 option prices requires crash frequencies roughly four times historical rates #expands (0.72) — Donald MacKenzie, An Engine, Not a Camera, 913