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OPTIONS & SPREADS: Sonatas at Twilight & the Horse Parlor Stock Exchange
"When I found the skull in the woods," wrote Jack Handey, "the first thing I did was call the police, but then I got curious about it. I picked it up and started wondering who this person was and why he had deer horns."
So, he looked at the skull and insisted on seeing Homo erectus instead of roebuck, despite the evidence of the antlers. Was he any sillier than those who see hard-sell TV commercials for foreign currency futures and envision fabulous profits? Who disregard the evidence of sharp horns punching holes in one's bank account?
Penny stocks and IPOs, dot com offerings and electronic chat room recommendations, futures and options on items from rough rice to interest rates, S & P "spiders" crawling all over the financial channel commercial -- few hopefuls look at these skulls and visualize skeletons of bankruptcy. Certainly, hope is essential for speculative traders but too frequently, it camouflages bloody antlers.
Those come-ons in your mail do not help any. You know, the ones with buffalo-sized announcements of huge gains, the ones that make speculation sound like an easy-pickings gold mine with nuggets as big as your fist. The ones with the "warning of risk" that the law requires squeezed into the tiny type above the printer's name, a hair's breadth from the bottom of the page.
Yet, hope can have a solid, business-wise foundation. Veins of gold and silver are not imaginary and the individual sourdough can be the smiler in the assayer's office. Inescapably, it requires knowledge of topography and methodology, ways and means. Many venture forth with just hope and hype, expecting all nuggets and no rattlesnake. Fledglings perish and years-of experience veterans have little to show for it.
A solid, business-wise foundation can underlie both the hope and the "how to go about it." If everybody's "blueprint for wealth" reached the brick & stone stage, the street outside your window would be jammed with chauffeured Lincolns. Yet, some blueprints do work at the concrete-pouring stage, including for the individual trader who is not marshaling millions in a corporate treasury:
Using stock options, my blueprint is the Horizontal Calendar Spread. My "office" is my desk at home or my pockets; my "business phone" is often the street corner touch-tone. The amount of my own capital that I float is typically less than $1,500 per venture plus -- and here is a crucial ingredient -- several thousands of dollars of other people's money. I would stay the hell away from options but for that latter item.
Why? Because my carved-in-stone One Commandment remains the W. D. Gann Maxim: "Handle speculation as a business, not as a gamble." Spread strategy uses substantial quantities of other people's capital and therefore in my estimation stands as the most business-like form of speculative trading. Like banking & bookmaking, it requires seed money or an outlay but is mechanically geared to gather profitable spill-over from other folk's bankrolls.
Also, like banking and bookmaking, it often gains while those who put up most of the cash lose. Spreading is not risk-free but can powerfully reduce the risk in futures and options, two forms of trading notorious for producing the results of a "one medal per 10 coffins" type of battle. With spread strategy, usually the coffin train carries away others' lost dollars. That is why I would not touch stock options unless that strategy armed me.
I received a thought-provoking letters from a gentleman, a dentist in Illinois. He wrote that he would like to leave the dental profession and become a successful full-time trader. My reply was, "I have good vibrations about you. Yet, you and I may be working at cross-purposes. You want to leave the dental profession and I want to make trading more like the dental supplies business, i.e., more a business and less a crap-shoot."
Alas, the Gann Maxim/One Commandment everywhere gets mangled in actual practice. "Handle speculation like a business" is like saying, "Drink only in moderation." Everybody claims to be doing so but millions of people clearly are not. That dentist can probably handle trades in a scientific, business-like manner, but so many others - you would urge them to "handle it intelligently" but does any living being claim not to?
Recently I became involved in a brief debate-in-print, which turned to the subject of investments when I did not expect it to. A piece in the Wall Street Journal waxed eloquent over horse-gambling in a bygone era. I wrote a response, which the Journal published 6-1-2000
At the Track, It Ain't All Guys and Dolls
Ray Kerrison (Tastes Page, Weekend Journal, 5/19) sentimentalizes the old-time horse-players with the cigar in one hand, pencil and Racing Form in the other. Straight from the pages of Damon Runyon and Ring Lardner.
Not everybody is so nostalgic. I am not completely anti-gambling, since I had my first investment success with Atlantic City casino stocks & parachuted out before they plummeted.
Yet I stopped believing that "wisdom comes with age" as an eight-year-old kid, the son of innkeepers in 1950s pre-casino Atlantic City. I saw too many gray-haired racetrack suckers. Too many fellows in sports shorts told my Old Italian grandmother, "Sorry, Katie. I got no money for another night's rent. Lucky Penny ran too slow."
In South Philadelphia's Little Italy they had a saying: "The reason you never see any horse manure on the racetrack is that all the horses' asses are at the betting windows." Greg Donio - New York. That prompted a rebuttal from a West Coast man "eminent in the field." On 6-9-2000, the Wall Street Journal -- printed the following:
No Hot Horse Harrys
In response to Greg Donio's June 1 piece about seeing "too many gray-haired racetrack suckers," I invite Mr. Donio to a day at the races in the year 2000. He would find that the horses asses are where they belong, on the racetrack, and that the people at the betting windows are in possession of a large amount of horse sense.
Nowadays, the sports shirts and loss of rent money he recalls from his youth are the stereotypical exception, and not the rule; 21st century horseplayers today are not the hunch players of yesteryear, but rather studious investors who apply high-tech concepts to gauge each horse's capabilities.
If that sounds similar to choosing a stock on the basis of its fundamentals, that's because it is. The modern-day racetrack, racebook or Internet wagering outlet has evolved into a fast-paced and exciting financial market unto itself. I know. I have 25,000 nationwide subscribers who will attest to it. -- TOM QUIGLEY - Publisher - The HorsePlayer Magazine- Beverly Hills, Calif.
Isn't it nice to know that horse-players are "'studious' investors" and that betting the nags is like "choosing a stock on the basis of its fundamentals?" Is the pad & pencil roulette-player also applying "high-tech concepts to gauge" patterns in the spin of the wheel? Like the racebook (horse parlor), is the worn-out poker table and the back-alley crap game on concrete "a fast-paced and exciting financial market unto itself?"
So, you see the problem. Everybody but-everybody claims to be the "studious investor" with the "scientific approach." Every Internet gambler and card-playing patsy with a rabbit's foot thinks himself "the mogul" who "handles it like a business." This extends heavily to the fast-swing buyers and sellers of stocks, futures and options.
The fellow with the sure-thing horoscope guide, the trader in the throes of speculation fever whose hunches keep missing, the dabbler who expects to massacre the big boys and don't keep me waiting and don't expect me to strain my brain, the thrower of good money after bad, etc, etc. Every one of them a "brilliant tycoon" by his own estimation!
To me, "handling it like a business" meant (1) learning the details and (2) achieving realistic profits, not overnight wealth. It is the "gambling degenerate" of the casino or the racetrack who expects $500 to become $5,000 before the twilight beer flows. He is the last to realize that if that big a gain were that easy, every desperate wagerer like himself would enjoy valet service and maid service. As for learning the details, few avid gamblers know anything worth knowing even about gambling.
So for futures, options and other speculations, too often the years of experience have resulted in depleted checkbooks and no knowledge worth following. Gee, he must have learned a lot from all that trading activity. Yeh, follow his advice and you'll borrow money for groceries just as tasty. He would not ask the restaurant supplies dealer or the barbering supplies dealer for advice because their profits are not 1,000% in a day. Yet, if he imitated them at least a bit his pockets would be less empty.
Not all-bad trading advice comes from rag-pickers and obscurities. Articles appearing in Futures Magazine caused me to send the editors a critique, which they did not publish. Here are excerpts of what I wrote:
In your June, article "The Best Reads for Traders," using the word "read" as a noun ("a good read") smacks of saloon slang, which may be appropriate since much of the advice is near the cuspidor level. Among the "best" according to your article are a whopping four books by or about the "legendary" Jesse Livermore.
Jesse Livermore made and lost four speculative fortunes. In 1940, he wrote the book How to Trade in Stocks and in 1941, the wiped-out man put a gun to his own head. Advice-wise, he stands as the classic example of a baldy selling hair-grower. Yet, he keeps appearing on the very latest lists of "best reads" and "top 20."
In the same issue, "Ratio Retracements" by Cornelius Luca drew heavily upon W. D. Gann and his calculations with Fibonacci numbers |
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