The stock is already down seventeen percent and the vultures are starting to pounce every which way. Some of them smell blood, but most of them just fear and the rush of money going up in flames. Me- I’m there in the middle of it holding a couple thousand calls which I just bought because Morgan our customer wanted to get them off their hands. I look at our fund manager, he closes his eyes as I buy the dirty laundry. I’m already down a cool seventy thousand dollars and the market has only been open for three minutes…
Where we are is some non descript building in the winter of 2003 in the heart of a chi chi neighborhood. If you look out the building you can see well attired women and children having their morning brioche and latte and the first glimpse of the morning’s headlines. The headlines come in various shapes and sizes, from what celebrity was caught doing what, which national leader embezzled what and which leading American company just missed their earnings. That probably explains all the red flashing signals in front of my computer screen and the maniacal look on Steve’s face our fund manager.
I get on the phone and call up one of our many brokers on the floor, whether I like it or not I’ve got to get part of my hedge off, the bitch of the question is how much of a loss am I willing to lock in now or if I should just be a hero and hope the market comes back the other way, not that the market being down six percent looks like coming back anytime soon.
The news isn’t good, the market is 05-10, 1000 by 5 million, which kind of means the stock is going to keep falling apart and tonight is going to be a heavy drinking day. I look around the room at all the other traders and it’s kind of a sick sight all round. Our warrants trader, a smart kid out of Columbia is banging his fist on the table, our gamma traders in disbelief and the other 3 option traders sitting next to me-(the head trader), looking at me as if I’m suppose to know what to do.
For those uninitiated Wall st is one hand a numbers game, a sophisticated set of numbers which you can analyze to death and try to make sense of. The trick of course is to come up with a belief system that will help you make money but importantly preserve money on days like these. The only good news at the moment is that I’m currently long a whole bunch of technology volatility premium which is starting to skyrocket in value. On one hand I’m down, but on the other hand I’m up too. That of course is neither here or now, because wall street is never about absolute value but relative value. When I next look at my screen the option portfolio is up at least 3 percent , which means I’ve already cut half the losses and by the end of the day by the time volatility premium really reaches it’s crescendo the fund will be up a couple hundred thousand dollars(according to Steve’s estimates), but if I don’t get the stock off we’ll be lucky if we’ll be up 50 000 dollars.
I’ve tried explaining this all to various girlfriends but after a while they just look at you and don’t even pretend they understand. Of course what really upsets me is when our firms trading clients take us out for dinner and drinks. The sales traders will act as if they understand what I’m telling them, volatility this, long butterfly positions and calendar spreads that I’ve put on a bunch of names that I think volatility is mispriced.
On one level it’s a genius’ game, and that’s good if myths are necessary but what it’s really about is understanding that there are certain correlations that in the best of times that will stay in place and then there are correlations which fall apart when the theories and the models don’t agree with the pension fund in Nebraska selling eight percent off his portfolio today along with the other 47 000 funds selling 8 percent of their portfolio along side him.
It’s days like this that even when I’ve had a fancy dinner and the necessary lap dance (boys will be boys say the sales traders…) that the institutional sales traders are floundering. The thing with most institutions on wall street (save for Goldman Sachs which has the decency not to believe the trollop it sells to the public) is that they believe in their rubbish. So when it’s time to for them to take some of their or customers losses they call up suckers like me, who they took out for dinner the other night and off load their rubbish. Of course if I still want to be friends I’ll take the bait because in the end we all scratch each other’s back, but really these guys are pigs and I’m not in the mood to humor them.
Of course that was then, last summer of 2008, the dirty laundry department was nowhere to be seen, banks and hedge funds were no to be found, nobody wanted to be the fall guy. So everyone stepped out of the way and if you remember correctly the market did a terrible woozy last summer falling something like thirty odd percent – with the end result a lot of the institutions with supposedly the brightest and heftiest capital balance sheets took a delicious beating that they wont be in a rush to ever relive, except inevitably they will…
When I say they will, it’s just a personal opinion, greed will always be greed and if you can get the public to always bail you out then one should never wonder why the funds keep taking the amazing risks they do. In reality it’s the common person on the street drinking his latte and believing in the ten percent up for posterity that is in greater risk. Of course that’s never a really very convincing sales line when you’re trying to raise money, so you keep talking about the myths while guys like me and even institutions like Goldman Sachs (one of the few funds that bought heavily in mortgage bond insurance –ie puts) wait for the myths to dispel.