Recall that a little more than a week ago, in a headline atop one of these commentaries, we invited you to “Join Us as We Short Every Stupid Rally.” And why not? Stocks are probably in a bear market now, and making money on the short side should be as easy as stringing beads, right? Well, not exactly. In the several years that have passed since we last experienced a full-blown bear, we’d forgotten how devious he can be. Expecting the worst, we somehow still put out advice to Rick’s Picks subscribers Wednesday night that had them looking for a last-gasp rally to get short. We even gave them a go-ahead to get long cautiously, based on a buy signal in the E-Mini S&Ps that had been triggered a day earlier. When stocks opened Thursday morning, however, what we saw instead was a 170-point collapse in the Dow on news that the Supreme Court had upheld Obamacare. The funny thing is, even bears who stuck to their guns could have lost money, since stocks came roaring back in the final hour.
Of course, all of this was stage-managed by institutional traders who make their living stealing from widows and pensioners, front-running their own customers and deftly exploiting fear and panic that they themselves have helped to incite. In this case, They pulled the rug at the opening, even knowing that the Supreme Court’s ruling seems likely to whip anti-Obama sentiment into a frenzy, sparing us four more years of the most rabidly anti-business President in U.S. history. Investors seem to have figured this out for themselves, and by day’s end they’d pushed the Dow back to nearly even at the bell. For DaBoyz, meanwhile, exploiting the 350-point swoon was all in a day’s work.
Too, Too Scary
So where does that leave us in our quest to make money being short in a bear market? Obviously, one cannot get short and simply stay that way. It’s just too dangerous. And too scary. Yesterday’s whoopee-cushion recovery, for one, unfolded in just 90 minutes – about a fifth of the time it had taken for stocks to reach their intraday lows. Permabears should keep this in mind as they attempt to leverage the downside during what is still only speculatively a bear market. They should also recognize that moments of relaxed satisfaction and pleasure will be fleeting. For even if the Dow Industrials were to fall to 1000, most of the more-than-90%-loss will have occurred in spasms measured in minutes and hours. The rest of the time – days, weeks and sometimes even months at a stretch — will have been spent with shares in a psychologically excruciating state of limbo…waiting…waiting…waiting for the other shoe to drop.
This will call for great patience as well as the understanding that bear markets always try to disguise themselves so that bullish arguments never stop sounding persuasive. In the meantime, we remain steadfastly committed to the task of Shorting Every Stupid Rally. And, make no mistake, it’s possible to do so — time and again — not only without getting hurt if the stock market continues to rise, but actually making money when we are positioned against the trend as we sometime will be. How well have we done at this? We invite you to visit the chat room, where you can ask subscribers yourself. Click here for a free trial subscription to Rick’s Picks that will entitle you to all of our daily trading recommendations, access to the chat room and to impromptu trading sessions held online during market hours. If you’d simply like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)
Dear Gary, re:
“Can you tell me how much those options in 87 cost? I heard they were pennies to the current dollar. I believe some people made 9 figures on a 2 to 4 thousand bet. Is that true?”
Some SPY Oct puts were trading at one ‘teenie (1/16), with two days to expiration on Thursday the 15th October 1987, and ran up at least sixteen times by Friday the 16th October 1987.
Those few that had out of the money November puts on Monday 19 October 1987 and covered on the opening Tuesday Morning 20 October 1987, when Soros lost a bundle to Rubin at GS, did much mo’ better.
The 1987 crash was so startling to academics when the Black Scholes and Portfolio Insurance Models failed, that at least one academic paper was written to rationalise it:
\http://www.rhsmith.umd.edu/finance/pdfs_docs/seminarspring06/Constantinides.pdf
Market maker friends on the other side of that trade survived if they were delta neutral hedged, even though the ratios failed.
Had a similar experience on the other side of the market in July 1984 when it took off, and illiquid teenie calls accumulated over weeks turned into dollar calls one day.
I was bonus recruited away from Merrill to bring my accounts over, didn’t and was fired after making so much money in my own account one day.
The manager closed out the account, leaving a lot of money in the market, and a painful arbitration paneled by three brokerage employees was less than satisfactory, leading me to briefly return to Merrill and Japan, start Stanford Capital to get involved with a private placement in Cetus and a medical device startup acquired by Biomet and taken private for a tidy sum.
Again, we are lucky to hit such market jackpots once or twice in our lifetimes going against the crowd. I certainly missed the flash crash on 6 May 2010.
Also, out of the money options are extremely illiquid and most of them expire worthless most of the time.
After a sudden windfall, many of us get arrogant, bold and cocky. We put and leave the money right back in the market, a different kind of transfer payment.
Thus, when I add up my trading gains and losses, I am still in the hole with tax loss carryforwards. That’s perhaps the biggest reason I trade now, just to get even. I look forward to Rick’s objective ABCD calls and do my own thing.
Now I trade in-the-money calls just below the market and in-the-money puts just above the market, just before expiration, at oversold and overbought market extremes, having learned from Rick to treat them like hot potatoes, with an overnight holding period.
More consistent than out-of-the-money’s whack a mole.
So right now I have some in the money QQQ puts and am curious to see what happens Monday with Merkel portrayed as a kicked soccer ball, the actual EZ funding “solution” not likely for a year or two, according to Daiwa and sub rosa bank runs all over the place for fear virtual money may disappear…