In vino veritas.
You don’t need to know how many parts Caesar divided Gaul into to understand the meaning of this Latin phrase. The ancient Romans knew bread, circuses, and fermented grape juice quite well.
Taking this at face value, there is truth in wine. It lubricates social mixers and releases inhibitions. Tongues wag and emotions overflow. But there is more than just foggy goggles. A stiff drink cuts straight to the point - and that’s useful.
A good place to serve that drink is a Nick and Nora glass. Tighter up top than a martini glass, this coup is useful for all drinks with short pours and tall attitudes. The name is inspired by the lead couple in the book The Thin Man by Dashiell Hammett.
This novel is soaking wet. Breakfast is served after noon and follows a round of drinks. Nick’s dry humor balances this to keep the conversation witty as the couple does their best to avoid getting involved with a sultry murder. Guns, dames, and booze.
Starting another gin speckled interview, Nick describes a witness as “handsome in a rather brutal, sloppy way.” While referring to women as handsome has fallen out of favor, and despite the later modifiers, I think this is a truly great compliment.
Beauty has many facets, and it mostly lies in the eye of the beholder. Delicate and coquettish don’t intersect with handsomeness, but health, strength, and wisdom do. The etymology is very literal, originally meaning something that was easy to work with the hands. Apt, clever, and capable.
Brutal and sloppy aren’t really all that bad either. Sure brutality is cruel, vicious savagery, but it’s also direct honest speech. There’s a lot to be said for that.
When it comes to trading, there’s nothing better than brutal feedback. The only way to learn is through a return value that gets you closer to the truth. Shooting in the dark is the perfect definition of zero feedback. You don’t know where your target is, or where your attempts are landing.
Sugar coating helps the medicine go down, even if it doesn’t find you well in an e-mail. HR was always keen to deliver a shit sandwich (bad news bundled up in wonderbread compliments). But don’t get distracted by the bun - focus on the shit.
Direct feedback only hurts because you have an ego. Be proud of your hard work and accomplishments, but not an opinion. Digging in your heels will tarnish the red bottoms, and blind you to the truth.
The first stock I ever traded that got hot was Joseph A Banks (JOSB). Short sellers jumped on the three suits for the price of one deal, and the borrow rate got highly negative. I knew what it meant academically, but I’d never really played the Reg-SHO waiting game. Lacking any guidance I would regularly buy back my shorts to stay off the risk desk radar.
Meanwhile every other trader was hanging out and earning all the premium on the rev-cons that were actively trading. It took a few turns, but the lame PnL and cycles of stock loan became enough feedback to see how to actually have an edge in the hard to borrow stocks.
The second stock that I had that got hot was XRT, the retail sector ETF. Unlike the slow burn and patience of JOSB, this was a flash in the pan. One afternoon order flow went bonkers, and my head trader looked over and shouted a bunch of expletives that amounted to “Get in there and make some money.”
It was brutal. It was sloppy. Johnny Ten Lot was click trading hundred lots and making big bold curve adjustments. There wasn’t any nuance of comparing the pump and tilts across like months, just drop vol on sellers and raise it on buyers. Pace and intensity create a feedback crucible. Ten thousand dollar mistakes were covered by twelve thousand dollar happy accidents.
I should have made a lot more money in XRT that day. But if I hadn’t just gotten in there with a bunch of hamfisted mouse clicks, I wouldn’t have made any. This was no place for delicate porcelain beauty.
When you’re making estimates in trading, sloppy and brutal work together. In the hand to hand combat of a live broker order, getting your hedge off before the crowd was tantamount. Everyone standing next to you just did exactly the same thing, and will all be going out to hedge the same stock in the same direction next.
Getting off 8000 shares when it should have been 8500 is a lot better than none. The precise delta of that option is a fuzzy estimation in itself, and starts changing the moment you take the trade. Besides, there’s a decent chance something comes back and takes you the other way and you’ve now paid the underlying spread twice.
One of my new rules of thumb has come around position sizing. It’s important for active traders to size their bets appropriately, and it gets complicated with spreads. How many debit call spreads should I buy on this speculative play if I have a $100k account?
If you want to set a max loss of 2% per trade (like you might do with a credit spread), there’s a big difference between spending 2% of your portfolio on a 50^ call than on a 5^ call. A useful and rough adjustment is to discount your budget by the delta.
Being right slightly more often than the price says, should do better than the losses. But the market is mostly efficient and 5 delta is gonna expire worthless pretty close to 95% of the time. Does it matter if you estimate 2% or 8%? Probably not, because over time your edge had better be a lot bigger than that error term.
As far as being brutal and sloppy, keep the fire in the fire. Wise scoutmaster words also apply here.
Roughing in position sizes for your active (play) portfolio or guessing a delta to get the lions share of a hedge off is the right place to be quick and dirty. The margin of error is swamped by the benefits.
Don’t lose track of fees. And be careful with implementation. While something is usually better than nothing, missing or overriding a strategy with discretion quickly muddies the waters. Be patient with orders, especially trading less liquid names.
Be diligent in your analysis and introspection about personal objectives. Use wild indiscretion with the long term buys in your 401(k). So save yourself the time and have a little fun; let brutal and sloppy have their place.
Very nice read, well done.