Divvies and Dingers
Vol #164: February 1st, 2024
Babe Ruth’s called home run is one of sports' drippiest moments.
During game 3 of the 1932 World Series, he watched two strikes go by, pointed to Wrigley’s center field and then blasted a curve ball 490 feet. Ruth had already homered once that game, and the Yankees were up 2-0 on the Cubs in the series. Sorry not sorry Chicago.
The jeering and heckling had been escalating since Game 1, so trash talking the next pitch came naturally. The feud sparked when Ruth called the Cubs “cheap bums.” The team voted for only giving former Yankee Mark Koenig a half share of the World Series bonus since he was traded mid-season. Comp rules everything around me.
Sure, Ruth had the wind in his favor, and the story was well promoted in newspapers. But it’s undisputed that he called it and then hit it. Very very far.
A setup and knock down like that is rare - in sports or markets. There are more ways to make money than words I’ve spilled into the ether. Few of them look like pointing a Louisville slugger at center field. Investors can and should hit homers, they just can’t call them.
Markets are exciting because there’s the chance of landing a dinger. Most of the time it’s just mechanics and making tea. Babe Ruth was also famous for his strike outs, a lot of call options that decayed into nothing. Imagine what the hitting coach said about his theta?
If you want to start pointing at left or right field, I’d recommend closing your brokerage account and opening a podcast studio. Toss out the clickbait with a glittering signal to catch fish and fishes. Pull back the curtain on HOW THINGS REALLY WORK.
The big secret is that making money is boring. For the pros down to the freshly opened 401(k) it’s the smallest details that matter most.
Every month options exchanges update their pricing in some dimension. This constant optimization is an attempt to shave points of marketshare as they tip routers obligatory best execution weightings towards their venue. This is what is material to professional options traders. The precision of a routing table is an edge to squeeze.
The market will wiggle, orders will tumble off the wheel, and positions will fluctuate up and down. But the absolute constant is the bill at the end of the month for your seven figure contract a day habit. The marginal theoretical pennies you stacked up in edge better outweigh both those bills and the cost of managing whatever long and short inventory that got dropped on you.
Fees are a material drag at every level of investing. If you could only remember one thing about how to set up a long term investment, it would be “diversified low cost indices.” There’s vicious competition to bring fees to nearly insignificant levels, but every bip counts. While the SEC was fumbling its way into an bitcoin ETP approval, issuers lapped each other in cost cuts to get nearly every expense ratio under 0.25%. And that’s five times what you should pay for an S&P vehicle.
On the buy side options strategies can turn singles into doubles, but you also invariably increase the complexity. A great way to improve the return profile of a simple equity investment is to layer on a put spread collar. It’s free, and provides a straightforward trade off between dampened returns and significantly reduced risk.
That structure adds a lot of value for many different investor types, but it also adds four trades a year if you roll quarterly. If you want to mitigate rebalance timing effects, more executions come with expenses both transactional and temporal. It’s really not that complicated of a position, but it’s still tricky to rock that rhyme right on time.
Investment home runs earn you the cover of the Wall Street Journal. Bottomless chablis over lunch with the FT. When asset managers discover value and position themselves correctly the rewards are stupendous. No stranger to laps around the diamond, Paul Tudor Jones has said that he tries to pick tops or bottoms several times before it happens. You just have to risk manage so you’re around to collect when it pays.
The only way to guarantee safe passage to first base is getting hit by a pitch. That’s exactly what I think about when I see dividend plays. This options strategy is roughly “a sure thing”, but all you’re doing is shorting operational risk with a fat tail.
A dividend play is taking advantage of someone’s forgetfulness. It takes as much trading skill as taunting a pitcher takes hand eye coordination. Buy a massive amount of call spreads, make sure you punch the longs, and hope to skate on the shorts. A few weeks ago in VZ, 1.2 million calls traded in the front month, roughly 17x normal volume and 10xing the open interest. The next day, about 4300 options that would have been punches didn’t get exercised, leaving all shorts with a free dividend.
But considering that there was $36M at risk, from someone not pushing a paper across the desk or the figures into a computer, I think I’d rather start taking pitches in the shoulder to make it to the big leagues. One mistake wipes out 125 wins. A div play feels a little slimy, but that money is going somewhere, it might as well be you. If you can find a clearing firm who wants to back that.
The details are what matter in your risk, and your reward. If you didn’t read the prospectus, don’t be surprised that VXX just grinds itself into reverse split after reverse splits and your long vol dreams melt away with it.
A good strategy is one that consistently puts men on base. It’s slowly chipping the odds just a little bit in your favor. Dollar cost averaging, collaring gains. The home runs come when we least expect them. Even Babe Ruth only called his shot once.