What does “unwind” mean - I keep reading that phrase, but don’t know what it means.
To “unwind” in financial lingo means to back out of a complicated position.
If you have a simple bond or stock in your portfolio, you simply sell it.
But what happens if you have a bond or stock, and then you have options written against that bond or stock? Well, you now have to sell off (or buy back) various aspects of the position in a particular order.
eg: Let’s say you have a stock, and you’ve written covered calls against it, and then used the proceeds of the call to buy a protective put. You want to wash your hands of the whole thing because the company is going bankrupt in a week (or they’ve been bought up, or something else). To do this, you typically need to:
1. Buy back the call.
2. Sell the put.
3. Sell the stock.
Unless your broker allows you to sell naked calls, you cannot do 3 before you do 1. 2 you can do before you do 3, but some option programs will close both option pieces of the position for you.
That’s “unwinding.”
Basically it is a slow collapse vs say, a fast crash.
Stocks are liquid. If people panic, they can sell their stocks very quickly, leading to a stock market crash.
Houses are very illiquid. It takes weeks or even months for a seller to finally accept a buyers bid, if a buyer ever does bid. If not, the seller must keep dropping his asking price until he finally sells. Because houses are illiquid, housing markets don’t so much “crash” like stock markets, as they unwind. They just spiral down over time.
The liquidity crisis we are in has the same effect on bank losses and bankruptcies. Banks don’t fail all at once. They are hiding their losses and trying to keep those debts from being called, keep from having to pay them all at once. They are raising capital and selling stock. So bank collapses, like housing, tends not to crash but to unwind.
There are way better financial people here at FR than me, so maybe this explanation misstates the term “unwind”. But that is the rough meaning of the term as I understand it. Hopefully you will get a more clear, more comprehensive definition from one of our exceptional financially trained Freepers. I thought I would take a shot at it, though... I don’t think I’ve missed the mark by too far.