Jun

16

I needed a hook to start in business in 1962.

Perhaps an audited record of market predictions would help.

I enlisted Laventhal and Horwath to audit the predictions.

They were 70% accurate over a 3 year period but they weren't useful at all because there was no futures and they didn't take account of the Fisher Effect.

Many stocks only traded at the open the next day.

But a Hungarian Palindrome found out about the predictions and we started a 10 year partnership.

We played a lot of tennis and chess.

And my kids really enjoyed staying at his Hampton estate in the summers.

But the palindrome was always bearish and he hated free enterprise and speculation.

I was the opposite.

He severed his connection with me in 2008.

The last words he said to me were, "you are going to lose everything when the market goes down but just turn your positions over to me when it happens."

While we were working together a backgammon player introduced me to options.

I saw a big anomaly.

The vol of the out of the money puts was much higher than in the money puts.

What I didn't realize and what I believe no one else realized was the margin rules were such that those who were long the puts held all the marbles.

Among other things, they established the rules and the margins.

A very astute banker once told me whenever a relative asks him for a loan he always gives half and says "That way we'll both lose half".

I believe both players mentioned above lost at least half as well.


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3 Comments so far

  1. Andre on June 16, 2016 5:03 pm

    On the floor at cbot in 2007 traders were trading sds and I remember a successful had been who attended wealth management dinners for Lehman clients announce that there was too much liquidity chasing too few assets. Maybe there’s a lot to be said for being in the middle of things and one with the idea that has world in grip instead of aloof of it.

  2. Doug Martin on June 16, 2016 10:47 pm

    The ones who are long the puts sure do have all the marbles.

    I had a great learning lesson not too long ago, and although it resulted in a decent sized loss, I am very happy it happened as I truly needed to experience and learn it on my own. Selling puts is a very profitable game, but I don’t swim naked anymore. Many people told me not to short Volatility, but I simply had to experience it myself. Shorting Volatility is like this Holy Grail in speculation, it just works well and is VERY easy money.

    It was Thursday August 20th 2015 and there was a nice spike in volatility. I said to myself, it’s about time and sold some Puts 18% out of the money on the SPX that expire in 50 days or so. Instantly they went against me.

    Sunday night, I’m lying in bed, lights out, eyes wide open watching the /ES moving 10 handles at a time. The volatility was so great that 10 handles within 2 minutes was common. I was in that trance like state where I thought the end was near. All I did was stare at the numbers and they were blood read and moving abnormally fast.

    I figured I could pair some of my losses by selling a couple contracts on the /ES to hedge my short puts but I was fearful that the margin clerks would close out my short Vol position at the absolute worst possible moment, because they too hold most of the marbles.

    After scratching the idea of hedging my position, I got some sleep (not sure how). I awoke, still in that strange trance that we all know about. Guy at work came up to me at 8:00am I tried to play cool and just acted tired in a real clammy over caffeinated condition. I pulled up my screen and the SPX puts I shorted at 3 the other day were trading at 60.

    To this day I wish I could have recorded the look on my face and my body movements. I don’t really remember much, but I’m sure I was silent, very still, and in a mild shock for about 4 straight hours.

    I got out of the position at about 28 a couple hours later, and many weeks later they went to 0 of course… But I did not care, and very happy to have learned my lesson.

    I still sell puts, but they are always hedged.

    The palindrome must have an eye for people that fall into that odd state I described, it’s a simple indication of what comes next.

  3. Anonymous on June 17, 2016 3:53 am

    2008? Please tell us more.

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