I was just a wee whippersnapper trying to cut my teeth as a local on the Chicago Board of Trade (CBOT). As a transplanted New Yorker all of 23 years old, I had never seen an ear of corn, a bushel of wheat, or crushed the meal or cracked the soy oil spread. But boy was I ready to trade them.
Most of you probably never heard of the Great Chicago Flood of 1992
. Several reasons help explain the lack of awareness or its lowly place in the annals of weather events. First, it was not a weather event, it was manmade and the result of simple repair job got FUBAR’ed. The damage was almost entirely underground and most of the surface was unaffected and the city ran smoothly. And it never got a name we could latch on to. I’m naming it “The Great Theta of ‘92."
Let me set the scene on both the trading floor and floodgate. I hadn’t yet learned about the extreme danger of having a long tail of naked option and was dragging one of brontosaurus size proportions into the spring planting report due on Wednesday. Friday was an expiration day. Implied volatility was high, as it should be, but all conditions suggested seeded acres would be record setting. Why should I not sell $8 bean calls, $5 corn calls and $6 wheat calls. I’m dating myself again as these numbers were, at the time, 40%-50% out-of-the-money; so deep you could bury Jimmy Hoffa.
Meanwhile, about two miles away, Chicago was innocently doing some repair work on a tunnel beneath a portion of the Chicago River. Note in 1901 the river was engineered to reverse the flow essentially causing Lake Michigan to flow into the various tributaries rather than vice versa. So this telecommunications worker, no firm formally took responsibility as most of the tunnels were built illegally and under no clear jurisdiction, had the grand misfortune of driving a piling down into, and breaking, an underwater tunnel.
The result was to essentially the beginning of a subsurface emptying of Lake Michigan into downtown Chicago. Nothing was visibly wrong but major building, such as the Chicago Mercantile Exchange
(CME) and the Board of Trade quickly saw their basements fill with 30 to 40 feet of water. Critical equipment were all underwater.
The exchanges were closed for three full days opening on the following Monday. The grain report turned out to bullish but the options had already expired. I swept up my profits and wipe my brow and thanked the incompetence of the Chicago Machine.
Gaily, on my way to gym I walked by the bridge that was the site of the event; they were literally throwing mattresses into the river in hopes of plugging the hole, praying they wouldn’t figure this out by expiration Friday. Then for the next year I threw a few coins of gratitude over the spot that let theta become my best friend.
No positions in stocks mentioned.
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