With the recent passing of the 21st anniversary of the 1987 stock market crash (Monday, October 19, 1987) and all the turmoil in the markets over the past few months, I thought I’d share an interesting personal story about events around the 1987 crash. I had been working in the securities industry for about four years at that time. The two weeks prior to the crash the market had been very volatile and virtually all to the downside.
Monday, October 5th closed virtually dead flat from the previous Friday. Then things started to fall apart, with the market down 5.18% the week of October 9th and another 9.12% the week of October 16th for a combined decline of 13.83% for the two week period.
On Friday, October 16th I was in Seattle for business. I had called my broker several times during the day to check on the market (before the Internet, calling your broker was the only way to get this information) and heard that things were deteriorating as the day wore on. I called her again about 10 minutes before the close from a pay phone at a restaurant (before cell phones you had to carry a lot of quarters). I had been thinking that the market either was going to rebound sharply or drop sharply on Monday, and I wanted to take a position. I knew the economy was in decent shape and having seen the market drop the prior two weeks I thought it was time for a rebound, so I decided to go long the market. I figured I had a 50-50 chance of being right. I don’t remember the exact security I purchased, but it may have been a near term option on the S&P 500 futures – I think it was due to expire on Friday, October 23rd. As I recall the position size was about $2,000, a meaningful position for me at the time but not a particularly large one.
We all know what happened on Monday, October 19, 1987. The bottom fell out of the market, driven by the age old phenomenon of everyone trying to exit at the same time (assisted by program trading that was quite unsophisticated at the time). The next few days were a wild ride.
After the close on the 19th, I went out for drinks at the Italian Village restaurant in Chicago with my friend Phil, who was also in the securities business. We knew we had been through an historic day. I was kicking myself for not going short the market the prior Friday – I remember thinking that had I bought puts instead of calls I would have been up about $30,000. Thankfully, there were plenty of great buying opportunities created by the crash. The economy chugged along almost unimpeded and the market recovered its losses of that day over the next 15 months, and then kept chugging forward.