Long-Term shorted options at prices that implied a market volatility of 19 percent a year (traders refer to this as “selling volatility at 19 percent”). As option prices rose, Long-Term continued to sell. Other firms sold in tiny amounts. Not Long-Term. It just kept selling. Rosenfeld, Hilibrand, and Modest worked the trade in Greenwich; Haghani and Hufschmid did it in London. Eventually, they had a staggering $40 million riding on each percentage point change in equity volatility in the United States and an equivalent amount in Europe—perhaps a fourth of the overall market. Morgan Stanley
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