After 35 years of brokerage for some of Australia’s and the UK’s biggest houses and investors, the Secret Broker regales Stockhead readers with his colorful war stories – from the trading floor to the dealer’s desk.
The kids introduced me to a new word this week, when I asked one of them how their new relationship was going.
They told me they were actually in a “situation” and not in a relationship.
When I asked them what they meant they just rolled their eyes and said I was too old to understand. So I just had to Google it, because I’m not too old to do it.
It would be “a romantic or sexual relationship that is not considered formal or established”.
So it seems to me that this is a “friend with benefits”, although it made me think. Neither side wants to use that “C” word.
Nobody wants to commit.
In my book you can find new words and terms, but at the end of the day everyone wants the same result, whether you’re alive this week or 200 years ago.
They want to find love and even with all these new dating sites and easier means of communication, they find it harder and harder to get the result they are looking for.
It’s the same in today’s markets. They all want to make money but are not committed enough to invest in the hard yards
All of these new investors can now get all the information they need on their phones through the latest apps, but very few are getting what they are looking for.
If you’re new to investing and go to a stock market forum for ideas, you might as well think of it as Tinder for Stocks. Swipe left for those that don’t appeal to you or swipe right for those that interest you.
“Mmm… lithium, mmm… only 20c. Oh they’ve been as high as $1.00 I think I’ll swipe right for this little hottie.
“Mmm…boring old bank, mmm…$90.00 per share and they used to be $107.00 per share and they pay a dividend. Uh yuck! Swipe left.
Now imagine if the guys who run a popular stock market forum turn off the “most discussed” button and keep that information to themselves.
Only they would be able to see which ones were talked about the most and buy them as they went. Then sell them as the discussion slipped into the “top 10 most discussed” as everyone started to show a loss of interest, moving on to the next “hottie” stock to start dating.
Well, that’s what brokerage used to be. You needed a broker to get a floor quote and only that broker could see their clients’ order flow. Very handy when a few customers had the inside running and you could grab it.
Then, when the floors closed and everything went on screen, you lost some of your unique knowledge, because everyone now had the same rules of the game.
Fast forward to today and you can now place your own orders directly in the queue and even see where you are in the queue.
You don’t even need to talk to anyone. Just aim and shoot.
All of this knowledge is within everyone’s reach and yet they still lose money by only buying high for fear of missing out (FOMO) and then panic selling at lows.
I will now refer to this relationship between an investor and their investment apps as being in a “stockpile,” with a party that is definitely not interested in showing any desire to engage.
There’s power in old farts
Why would a novice investor want to commit to doing their homework, when they have everything at their fingertips?
Do these young kids today really think that everyone tells the truth on a dating app or doesn’t show a heavily edited photo in their profile? Do they ever think that someone who launches an action on a forum is actually a salesman and two timers?
No, of course they don’t. They think they have power over us older gray haired players when in fact they don’t.
A prime example is in America, where options trading volume has exploded and billions (and I mean Billions) dollars went from phone app marketers to gray-haired old business farts.
Millions of players are all going one way and with only a concentrated handful of trading houses going the other way.
Some use forums like Reddit to get their “business edge”. The other side is just using good old fashioned knowledge.
In February 2022, options trading on the main U.S. equity derivatives market hit record highs for two consecutive days, topping 63 million contracts each time. This is equivalent to trading 6.3 billion shares in a single day.
The average daily volume in January 2022 was 44.9 million contracts, compared to 39.4 million in 2021.
The other side thinks buying 10 short call options at US$225 at 12c is very cheap, when the stock is trading at US$200. For them, paying $120 for stock rights worth $225,000 is like buying a lottery ticket.
I see a profit of 120 USD almost 100% guaranteed for me; all they see is the potential to earn thousands over the next two weeks, which is certainly not guaranteed.
As 90% of all options created on listed stocks expire worthless (whether in America or Australia, the same statistics apply), you clearly want to be on the side that creates and sells all those options to the crowd.
Once you sell them, you stay short of them until they expire worthless and disappear (forever) and give you that $120 USD to keep (forever).
The good old days – really good
Unfortunately for me, I no longer have the energy to put everything together and take advantage of these beginner traders without commitment, although in the past I certainly did. I was engaged with a capital ‘C’.
Before all those rookie Robinhood traders arrived on the scene and long before Bitcoin came into existence, forex markets were becoming the way to make easy money.
Online courses were sold to the masses and I was willing to sell them options and hold them until they expired.
Every night in America I would bid call options that had three weeks left to expire, collect the money and pay the margin and hold them until they died.
However, these were no ordinary options. These were options on the forward market price of the currency.
It would work like this.
- Spot market currency rate 110 to 111
- Three-month futures price 112 to 113
- 115 call option price with three weeks until expiration 10c to 12c.
So I would put options to sell at 12c and the margin would cost me 30% of my account balance. The remaining 70% of my capital would be my margin buffer.
When they expired worthless three weeks later I got all that margin back plus my 12c per option sold.
That’s how things got crazy, with me on one side and 100,000 on the other.
Once, on the very last day of their life, these options went from 1c to 12c then back down to 1c then expired at 0c and on a really big volume.
The spot currency was 110, the forward price was 112, which meant that the spot exchange rate had to “move” to 115 within a day, for the person who paid me 12c for this option.
Since this was the price of the Euro against the US Dollar, the odds of this happening would be 10 billion to 1.
Come spin! Come in spinners!
Bed bath and Begone
Currently, the big stock options trading warrior of interest is Bath Bed and Beyond (USA Ticker: BBBY) and the one I would definitely trade options in if I were a younger me.
Sell $9.00 calls at 60c each with seven days to expiration, two of which are a weekend without trading? These are the type of odds that really grab my attention.
The buyer of these options needs the stock to move from its current price of US$8.24 to US$9.60 (US$9.00 call option plus 60c premium paid) just to reach the break even.
Yesterday over 2000 options contracts changed hands between 35c and 65c and finally 60c. From memory, each option entitles its holder to 100 shares.
Take a look at this:
So I would be fully committed to making sure everything is much more in my favor than the other 100,000 bettors, because that’s how I think.
Sink or swim? How about surviving?
I send boat-owning friends crazy because the first thing I do when I get on their boat isn’t get champagne on the back deck. No, I demand to see how many life jackets they have on board.
If there aren’t enough life jackets to cover the number of people on board, I simply step back from the boat. This way I have largely avoided my chances of dying at sea and I still find that none of the youngsters follow me and ever come down.
And that’s how I like it.
I zigzag when others zigzag and zigzag when others zigzag, especially when trading options and stocks. So should you.
Just remember that you don’t want to fight for life jackets while the ship is sinking.
You want to be sitting in a beach chair watching, in a “situation” with a bottle of Bolly. And with your head definitely above water!
The Secret Broker can be found on Twitter here @SecretBrokerAU or by email at [email protected]
Do not hesitate to contact him with your best stock advice and ideas.