Madoff Fraud

[chad17]

"Mr. Madoff would buy a basket of stocks resembling an S&P index while simultaneously selling options that pay off for the buyer if these stocks soar, while also buying options that pay off if the index tumbles. The supposed goal was to have smooth, steady returns."

I'm trying to figure this one out. Does this mean his strategy was to write covered calls and at the same time buy put options on the same stock?

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[JoeyDVivre]

The amazing thing is how easy it is to fool people with this kind of talk. "Well, we will never give you a 40% return. Our goals are more modest, you know, 1 - 2%/month while avoiding many or any down months is fine with us. So we just use our black box mathematical program that Joey wrote to buy puts and sell calls" Then you put that together with an historic track record and people think you have found those magically mispriced index options so they can get their 18% return.

If you told people you were buying bonds that should return 18%/year, they would go nuts. Talk options and they see math they can't understand and think they have found the money machine.

 

[Nep-hi]

I'm depressed that my industry is so corrupted. He better NOT have a CFA!

 

[Trogdor]

I believe his strategy is what Alf referred to as "Gains on Paper".

Seriously though, what he claimed he did (but never actually did, or maybe did but back in the day) was buying a call/put option on a basket of stocks and simultaneously selling calls/puts on individual constituents. It's also referred to as Split Strike Conversion strategy.