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Chapter 568 Goldman Sachs' Strategy

20 Wall Street, Lower Manhattan, New York.

The Goldman Sachs headquarters building, like a giant steel tower, pierced through the morning mist.

27th floor, derivatives trading room.

This is one of Goldman Sachs' most dynamic and riskiest core areas. The tranquility of the night has faded, and it is now enveloped by a dense symphony of keyboard clicks, each click potentially affecting the flow of hundreds of millions of dollars.

Mike Rich sat upright in front of a computer, his face sharply defined by the cold light emanating from the screen.

His light blonde hair was slightly messy, but this did not diminish the sharpness in his eyes that seemed to penetrate everything.

This 34-year-old head of the options trading department is a well-known figure within Goldman Sachs.

Five years ago, he designed a complex options combination trading strategy based on his accurate prediction of industry trends and keen grasp of market sentiment.

This deal defied market volatility and ultimately earned Goldman Sachs a net profit of over $1.6 million, becoming one of Goldman Sachs' most classic transaction cases.

Since then, his life has been like a dream come true. He has risen from an ordinary trader to his current supervisory position, wielding decision-making power over billions of dollars in trades.

I heard there's a chance he'll be promoted next year, and he's one of the candidates to succeed the retiring Cummins and take over the entire securities trading department. But nobody thinks there's anything wrong with it, and nobody feels resentful. Mike Ritchie's work ethic and performance are his biggest source of confidence.

At this moment, his fingertips hovered over the black keyboard, his slender fingers tapping nimbly, and a complex combination of letters appeared on the screen.

Δ (Delta), Γ (Gamma), Θ (Theta), vea (Vega), p (Grace).

These seemingly obscure Greek letters are the common language of derivatives traders and a core indicator for measuring option price changes; they are collectively known in the industry as Greek values.

Delta represents the sensitivity of an option price to changes in the price of the underlying asset. Gamma is the rate of change of Delta, reflecting the sensitivity of Delta to changes in the price of the underlying asset. In layman's terms, it is the sensitivity of sensitivity, or very sensitive.

Theta measures the impact of time on option prices. Options are like commodities with a limited shelf life; as the expiration date approaches, their time value gradually decays. Theta values ​​are usually negative, meaning that the option price will naturally drop by a certain amount each day.

Vega represents the sensitivity of an option price to changes in the volatility of the underlying asset. The higher the volatility, the greater the uncertainty value of the option.

Most financial institutions that trade options are essentially trading on volatility, profiting from the volatility spread.

The soft factor reflects the impact of interest rate changes on option prices, but this is generally reflected in long-term options and is unrelated to short-term options.

The string of Greek letters that Mike Ritchie typed was a risk assessment framework he was building for an upcoming transaction.

When he finished typing the last letter, he pressed the Enter key, and a dense set of numbers instantly popped up in the center of the screen. This was the calculation result of the Black-Scholes model.

This model, jointly created by Fisher Black, Myron Scholes, and Robert Merton in the 70s, was the first mathematical model capable of scientifically calculating the theoretical price of options, holding a cornerstone position in the field of financial derivatives. For traders, the Black-Scholes model is like a precise scalpel, accurately pinpointing the reasonable price range of options and helping them determine whether the underlying option is overvalued or undervalued, thereby formulating buy or sell strategies.

At this moment, the scalpel is aimed at a publicly traded company on NASDAQ with the ticker symbol lc.

Anyone familiar with NASDAQ knows that it's the stock ticker symbol for YueDong Games.

"Mike, how's it going?" A young voice broke the silence in the trading room as his assistant, Cole, strode over to his side.

"The model results are in line with expectations." Mike Ritchie's gaze remained fixed on the screen, his fingers rapidly tapping on the keyboard, bringing up more detailed data charts.

"The group's prediction was correct. No matter how you calculate it, it's impossible to make a profit through legitimate means. We might even incur losses due to the fees charged on the loans."

"To profit from this operation, we cannot use the conventional exchange trading model; we must use a TC structure." His tone was resolute, without the slightest hesitation.

TC stands for over-the-counter trading, as opposed to exchange trading.

Unlike standardized options contracts traded on exchanges, current over-the-counter options do not have fixed strike prices, expiration dates, or contract units, nor do they have centralized trading venues, unified clearing mechanisms, or strict regulatory disclosure requirements.

In today's financial markets, over-the-counter options transactions are usually agreed upon by the two parties through private negotiations. The contract terms can be customized according to the specific needs of both parties, making them highly flexible.

The task he was given was too time-sensitive; he had to complete all the position building within a week, which was simply impossible using the exchange model.

If someone made such a request, the person being asked to comply would be as likely to slap the other party in the face as trying to fly with their own arms outstretched. Therefore, only this model of non-centralized settlement combined with private negotiation has room for maneuver.

"We signed swap agreements with Merrill Lynch and Bear Stearns, having them hold our short positions on our behalf, and then hedged the risk through options," Mike explained his plan. "This way, we can circumvent the SEC's position disclosure requirements and amplify our leverage."

Mike's thinking became clearer and clearer, and his speech gradually quickened, with a hint of barely concealed excitement in his tone: "By using off-exchange barrier put options, we can build a basic short exposure, reduce surface risk by designing barrier prices, and then supplement the stability of the short exposure through total return swap agreements with brokers such as Merrill Lynch to ensure the scale of the short position."

Cole listened attentively to Mike's explanation, but his brows furrowed involuntarily.

He was very clear about the ingenuity of this transaction structure and also knew its advantages and disadvantages.

On the surface, through barrier pricing design and multi-dimensional hedging, the risk seems to have been reduced to a low level.

However, the core premise of the entire transaction is that the stock price of YueDong Games must fall within the agreed time.

"Mike, you're betting your career on this." Cole's voice carried a hint of worry, even disbelief.

"This process may seem stable and secure, but it is essentially a highly leveraged and aggressive transaction."

The bigger the waves, the more expensive the fish; this principle applies everywhere.

With lower risk, you have to leverage as much as possible to get big returns.

Mike Ritchie's design aimed to maximize profits through high leverage. However, once the settlement date arrived, the stock price of Leap Games did not fall; for every cent it rose, their department suffered losses of several tens of times.

Of course, Goldman Sachs is not going to cover this loss; they won't pay a single penny beyond the margin.

As for responsibility, it all belongs to Mike Rich.

Because over-the-counter (OTC) transactions lack the strict legal constraints and unified clearing mechanisms of exchange-traded transactions, they rely primarily on the credit and contractual spirit of the transacting parties.

If the transaction results in huge losses, Goldman Sachs can simply deny responsibility, shift all blame to Mike Ritchie, sue him for illegal operations, and claim ignorance to protect the company's reputation and interests.

This kind of tactic of sacrificing pawns to save the king, or rather, blatantly cheating, is not the first time that major Wall Street giants have done it.

So-called reputation often proves to be extremely fragile in the face of huge losses.

"I know the risks involved," Mike Rich said calmly, his eyes showing no sign of tension or panic, but rather excitement and anticipation. "But if it succeeds, it will be a record-breaking deal for our derivatives division."

He leaned back in his chair, looking up at the ceiling, his gaze seemingly able to penetrate the thick walls and reach the offices upstairs. "If I close this deal, I'm determined to get Cummins' position after he retires."

Cole understood; Mike Ritchie was referring to the position of head of Goldman Sachs' trading division.

This position is one of the most prestigious management roles within Goldman Sachs, granting the holder the authority to make trading decisions involving hundreds of billions of dollars. Not only does it come with immense power, but the compensation is also astronomical.

Reaching that position signifies true entry into Goldman Sachs' power structure. Mike Ritchie had an impressive track record, but the competition for that position was extremely fierce.

Those who can rise to a position as head of a specific department at Goldman Sachs are not mediocre.

This is a securities department, and it's not just a derivatives department. It also includes several core business segments such as foreign exchange trading, fixed income, and stock trading. The heads of each segment are highly successful and profitable individuals with outstanding performance and extensive industry resources.

Moreover, the decision to hold that position requires approval from high-level officials, and seniority and connections become crucial factors in the decision-making process.

And this is precisely where Mike Richie's weakness lies.

He had only been with Goldman Sachs for five years, while most of the other department heads were long-term employees with more than ten years of experience. They had accumulated extensive personal connections within Goldman Sachs and maintained close relationships with board members and senior executives.

Therefore, if he wants to achieve rapid success, he can only focus on the trading itself and impress the higher-ups with his performance.