One of the most popular income strategies among all investors is, hands down, the covered call strategy. Buy a stock, sell call options against it. By selling call options against your shares of stock you can lower the cost basis of your stock or simply use the call premium from selling the options as a source of income.
It’s an easy strategy to implement, but the problem, at least for some, comes down to capital. You must have at least 100 shares of stock to sell a call. For some, acquiring 100 shares just isn’t affordable. Others prefer not to up tie up working capital toward 100 or more shares of stock.
But, there is an alternative to a covered call strategy . . . a good one. It’s a strategy known among options geeks as the “poor man’s covered call.”
A poor man’s covered call is similar to a traditional covered call strategy, with one exception in the mechanics. Rather than buying 100 or more shares of stock, an investor simply buys an in-the-money LEAPS call and sells a near-term out-of-the-money call against it.
LEAPS, or long-term equity anticipation securities, are basically options contracts with an expiration date longer than one year. LEAPS are no different than short-term options, but the longer duration offered through a LEAPS contract gives an investor the opportunity for long-term exposure. Essentially, LEAPS, when used in a poor man’s covered call strategy, act as a stock alternative.
The Poor Man’s Covered Call: Mechanics
So how do I start in the poor man’s covered call?
First of all, I always start – just like when I use a traditional covered-call strategy – by choosing a low-beta stock. I want a stock with low volatility because the strategy works best when there is minimal vacillation in the underlying stock.
Take, for instance, Wal-Mart Stores (NYSE: WMT).
The stock exemplifies the typical low-beta, blue-chip stock that I look for when using a poor man’s covered call strategy.
The next step is to choose an appropriate LEAPS contract to replace buying 100 shares of WMT stock.
If we were to buy WMT stock at $99.18 per share, our capital requirement would be a minimum of $9,918 plus commissions ($99.18 times 100 shares).
If we look at WMT’s option chain, we will quickly notice that the expiration cycle with the longest duration is the January 2020 cycle, which has roughly 751 days left until expiration.
With the stock trading at $91.18, I prefer to buy a contract that has a delta of around .80. Let’s use the $75 strike for our example.
We can buy one options contract, which is equivalent to 100 shares of WMT stock, for roughly $27.20. Remember, always use a limit order – never buy at the ask price, which in this case is $28.85.
If we buy the January 2020 $75 strike for $27.20, we are out $2,720, rather than the $9,188 we would spend for 100 shares of WMT. That’s a savings on capital of 70.4%. Now we have the ability to use the $6,468 in capital saved to work in other ways.
Next Step
The next step is to sell an out-of-the-money call against our Jan 2020 75 call LEAPS contract.
We can sell the February $100 strike with 51 days left until expiration against our WMT January 2020 LEAPS.
So, let’s say we decide to sell the $100 strike for $2.36, or $236, against our $100 LEAPS contract.
Our total outlay or risk now stands at $2,484 (cost of January 2020 LEAPS contract minus premium of February $100 call) and our return on the trade over 51 days is 8.7% for the poor man’s covered call.
Using the poor man’s covered call strategy, we can continue to sell calls against our LEAPS contract every month or so to lower the total capital outlay. But remember, options have a limited life. So, when we get closer to the LEAPS contract’s expiration, we will simply sell the contract and use the proceeds to continue our poor man’s covered call strategy.
One month ago, we said that the beginning of the end of the covid pandemic would mysteriously coincide with the Biden inauguration, and sure enough that's precisely what has just happened. As BofA's Ethan Harris writes overnight in his daily COVID news wrap, "with COVID cases falling and vaccines accelerating, this is probably the beginning of the end of the COVID crisis", echoing similar notes from a variety of other banks published today.
What has sparked BofA's optimism? Harris explains:
Renewed restrictions and the end to the holiday season seem to be bending the cases curve.
The vaccine rollout should continue to accelerate as new resources and effort is put into the project.
There is one major caveat: new more contagious strains have arrived in the US. Bending the curve
The BofA economist then argues this point with his chart of the day, which shows that the US is now clearly over the hump, with 142,000 COVID cases in the US on Monday, down 32% from the prior Monday.... the seven day average has also dropped, to 209,000, down 16% from the peak on January 8th. In another good sign, Harris notes that "testing is increasing and the share of tests that come back positive is falling" and cheerfully adds that "It seems clear that an end to the holiday season, a modest increase in restrictions and a small increase in herd immunity is bending the COVID curve."
To be sure, while deaths are still trending higher with the 7-day moving at 3,300 as of yesterday, this is a lagging trend, and BofA says that "this is up only 1.5% from a week ago, so we may soon see a flattening of the fatalities curve."
The key reason for BofA's cautious euphoria is the same one we flagged a month ago: as Harris notes next, "after a very slow start, vaccinations are picking up speed. The seven day average has accelerated from roughly 200,000 per day initially to 800,000 yesterday and continues to rise. Looking ahead, we think they will be able to ramp up shots to more than a million a day for an extended period."
We see four reasons for optimism. First, after months of fiddling and diddling there is federal money to support local distribution efforts. Second, there is a learning process going on. Slow states can learn from fast states. Experience has shown that it is better to not hold back second doses. Third, resistance to getting the vaccine is likely to continue to ease especially if there is an effective and transparent public information campaign. Fourth, as COVID cases and hospitalizations ease, it will free up medical resources for the vaccination effort.
What does this declaration of victory mean for the economy? As a result of what BofA now sees an gradual return to normal, the bank sees upside risks to its above-consensus forecast:
We think the vulnerable population will be inoculated by March/April, cutting hospitalizations dramatically, and allowing a partial reopening. Michelle Meyer and team have already boosted their GDP forecast for 2021 from 4.6% to 5.0% based on a somewhat earlier and bigger stimulus package. Moreover, like most forecasters they have not incorporated the impact of a second package. Indeed, as we will write more about, the proposed $1.9tr on top of $0.9tr would almost match the stimulus last spring, at a time when the economy is already posed to surge.
Just ignore the inflationary conflagration that could follow the combination of trillions in new stimulus hitting at the same time as the economy returns to normal.
There's more, however, because it was not just BofA that is on the cusp of declaring victory. In a note also published overnight from Goldman's top economist Jan Hatzius, he writes that "a vaccine-driven reduction in hospitalizations is likely to kick off the growth rebound through relaxed restrictions and some reductions involuntary consumer social distancing." The bank smodel the vaccine impact on hospitalizations in the US, where they appear to have peaked – consistent with what we published a month ago– and in the UK, where they are are now flattening.
Goldman then repeats its core thesis, that vaccinations targeting the most at-risk group is what has tipped the tide: in the US, over 65s account for 50% of Covid-19 hospitalizations and 80% of fatalities but only 15% of confirmed cases. As a result, Goldman says that vaccination campaigns across the globe have prioritized these high-risk groups to front-load public health benefits.
Furthermore, Goldman estimates that the 20% highest vaccine priority citizens in the US and UK have accounted for roughly 50-60% of hospitalizations so far. Moreover, in the UK, where age more than occupation determines priority, the 20% highest vaccine priority citizens have accounted for nearly 90% of fatalities compared to roughly 65% in the US.
Putting these numbers in context, so far around 45% of long term care facility residents and staff in the US and at least 50% of ages 80+ in England have already received their first dose.
Next, Goldman picks up on its analysis from mid-December, laying out its revised hospitalization scenarios. Pointing out that according to its estimates, vaccinations so far have likely lowered US and UK hospitalizations by 2% and 7%, (by comparing actual hospitalizations and hypothetical hospitalizations if there had been no vaccinations) the bank then estimates that through April, vaccinations should reduce hospitalizations by nearly one-half in the US and three-quarters in the UK relative to counterfactuals assuming no vaccinations (Exhibit 7).
More importantly, Goldman now estimates that hospitalizations have likely already peaked in both the US and the UK, "even under the pessimistic scenario where hospitalizations among the non-vaccinated far surpass their already record high levels."
Finally, Goldman estimates that hospitalizations, which are currently still very elevated, are likely to remain above their early November levels for much of Q1 although these should drop to almost zero by the summer (Goldman's projected declines in hospitalizations are smaller in the US than in the UK, due to the less rapid US vaccination timeline).
Details aside, Goldman's optimistic conclusion is that US and especially UK hospitalizations decline significantly in coming months in most scenarios (that said, while recent hospitalization trends are encouraging, slower vaccine distribution, lower demand among priority groups, accelerated virus spread from new strains, and potentially reduced vaccine efficacy pose significant downside risks).
And while there are the usual cautionary statements, Goldman - like BofA - is now confident that we have now seen the worst of the covid crisis, and is also why Goldman is comfortable with its baseline view that vaccine-driven reductions in hospitalizations will contribute to annualized Q2 growth reaching 10% in the US. Oh, and yes, that this "new covid dawn" coincides with Biden's inauguration is not lost on anyone.
Director of National Intelligence (DNI) John Ratcliffe assessed that China interfered in the 2020 federal elections, according to a letter transmitted to Congress.
Nominee John L. Ratcliffe during a Senate Intelligence Committee nomination hearing at the Dirksen Senate Office building in Washington, on May 5, 2020. (Gabriella Demczuk-Pool/Getty Images)
In the letter (pdf), Ratcliffe alleges that intelligence about China’s election interference was suppressed by management at the CIA, which pressured analysts to withdraw their support for the view.
Citing a report by the Intelligence Community’s analytic ombudsman Barry Zulauf, the director of national intelligence said that some analysts were reluctant to describe China’s actions as election interference because they disagreed with the policies of President Donald Trump.
The Washington Examiner published Ratcliffe’s letter and the ombudsman report on Jan. 17, 10 days after publishing an original report on the documents. The ODNI didn’t immediately respond to requests from The Epoch Times to authenticate the documents.
“Based on all available sources of intelligence, with definitions consistently applied, and reached independent of political considerations or undue pressure—that the People’s Republic of China sought to influence the 2020 U.S. federal elections,” Ratcliffe wrote.
The report by Zulauf was sent to Congress on Jan. 7 alongside an intelligence community assessment of interference in the 2020 election. In the report (pdf), Zulauf states that the analysts working on Russia and China applied different standards to their reporting on election interference. While labeling Russia’s activity as clear election interference, the analysts were reluctant to do the same for China.
“Given analytic differences in the way Russia and China analysts examined their targets, China analysts appeared hesitant to assess Chinese actions as undue influence or interference,” Zulauf wrote.
“These analysts appeared reluctant to have their analysis on China brought forward because they tended to disagree with the Administration’s policies, saying in effect, I don’t want our intelligence used to support those policies.”
Neither the ombudsman report nor the letter from Ratcliffe includes details on China’s meddling. Zulauf redirected an interview request by The Epoch Times to the ODNI, which didn’t immediately respond to an emailed request.
The analytic ombudsman’s report assesses that politicization occurred in relation to both Russia’s and China’s election interference. Zulauf assessed that neither intelligence community leaders nor analysts are at fault, blaming the hyperpartisan atmosphere in the United States instead.
“In most cases, what we see is the entire system responding to and resisting pressures from outside, rather than attempts to politicize intelligence by our leaders or analysts.”
The report states that the analysts who assessed Russia’s election interference had complained that the intelligence community management was reluctant to deliver their assessments to government clients because the work was not “well received.”
“Analysts saw this as suppression of intelligence, bordering on politicization of intelligence from above,” Zulauf wrote.
The Epoch Times previously documented a multi-pronged election influence campaign linked to the Chinese Communist Party (CCP).
In a Dec. 3 op-ed, Ratcliffe said the CCP “poses the greatest threat to America today, and the greatest threat to democracy and freedom worldwide since World War II.”
“The intelligence is clear: Beijing intends to dominate the U.S. and the rest of the planet economically, militarily, and technologically,” he wrote.
“Many of China’s major public initiatives and prominent companies offer only a layer of camouflage to the activities of the Chinese Communist Party.”
Congress certified Joe Biden as the president-elect on Jan. 7. In the two months leading up to the certification, Trump challenged the outcome of the election in seven states, citing unconstitutional changes to election laws and potentially illegally cast votes.
I was born at the end of Gen X and the beginning of the Millennial Generation, and grew up in a middle class town. Life was good. Our home was modest but birthdays and Christmas were always generous, we went on yearly vacations, had 2 cars, and there was enough money for me to take dance classes and art lessons and be in Girl Scouts.
My 1940s born Dad raised me to be patriotic and proud, to love the war bird airplanes of his era as much as he does, and to respect our flag and our country as a sacred thing. I grew up thinking that being an American was the greatest gift a person could have. I grew up thinking that our country was as strong, and honest and true as my Dad. I grew up thinking I was free.
As an adult, I have witnessed the world I grew up in fall to ruin. I have watched as our currency and our economy have been shamelessly corrupted beyond redemption. Since we’ve been married, my husband and I TWICE had our meager investment savings gutted by the market that we were told to invest in, now that pensions no longer exist and we working stiffs are on our own. We will be working until we die, because the Social Security we’ve been forced to pay into has also been robbed from under us.
I have watched as our elected officials enter Congress as ordinary folks and leaves as multi millionaires. I have watched my blue collar husband get up at an ungodly hour every day and come home with an aching back that we pray will hold out long enough to get him to old age in one piece. Outside of shoes, socks and underwear, almost everything my family wears was bought used. We’ve been on one vacation in 12 years.
We don’t have cell phones, or cable, or any sort of streaming services, just a landline and internet. We hardly ever eat out. Our house is 1400 square feet, no air conditioning. I cook from scratch and I can and I garden and I raise chickens for eggs and meat and I moonlight selling things on Etsy. Still it is barely enough to pay the bills that go up every year while service quality and the longevity of goods goes down. What I just described is the life you can live on 60K a year without going into debt.
At last calculation, when you consider all of the federal, state and local taxes plus registration and user fees, Medicare and SS payroll taxes, almost a third of what my family earns is stolen by the govt each year. What’s left doesn’t go far, just enough to cover the basics and save a little for when the wolf howls at the door.
I watched as my family’s health insurance was gutted and destroyed. Our private market insurance, which we had to have because my husband’s employer is too small to have a group plan, was made illegal. We were left with the option of either buying an Obamacare plan with unaffordable deductibles and insanely ridiculous out of pocket maxes, or paying the very gov’t that destroyed our healthcare a fine for not buying the gov’t mandated plan that we cannot afford. We now have short term insurance that isn’t really insurance at all, and I live in fear of one of us getting injured or sick with anything I can’t fix from the medicine cabinet.
I have watched as education, which was already sketchy when I was a kid, became an all out joke of wholly unmathematical math, gold stars for all, and self-loathing anti-Americanism. My family has taken an enormous financial hit as I stay home to home school our child. At least she’ll be able to do old-fashioned math well enough to see how much they are screwing her. A silver lining to every cloud, I guess.
I’ve sat by and held my tongue as I was called deplorable and a bitter clinger and told that I didn’t build that. I’ve been called a racist and a xenophobe and a chump and even an “ugly folk.” I’ve been told that I have privilege, and that I have inherent bias because of my skin color, and that my beloved husband and father are part of a horrible patriarchy. Not one goddamn bit of that is true, but if I dare say anything about it, it will be used as evidence of my racism and white fragility.
Raised to be a Republican, I held my nose and voted for Bush, the Texas-talking blue blood from Connecticut who lied us into 2 wars and gave us the unpatriotic Patriot Act. I voted for McCain, the sociopathic neocon songbird “hero” that torpedoed the attempt to kill the Obamacare that’s killing my family financially. I held it again and voted for Romney, the vulture capitalist skunk that masquerades as a Republican while slithering over to the Democrat camp as often as they’ll tolerate his oily, loathsome presence.
And I voted for Trump, who, if he did nothing else, at least gave a resounding Bronx cheer to the richly deserving smug hypocrites of DC. Thank you for that Mr. President, on behalf of all of us nobodies. God bless you for it.
And now I have watched as people who hate me and mine and call for our destruction blatantly and openly stole the election and then gaslighted us and told us that it was honest and fair. I am watching as the GOP does NOTHING about it. They’re probably relieved that upstart Trump is gone so they can get back to their real jobs of lining their pockets and running interference for their corporate masters. I am watching as the media, in a manner that would make Stalin blush, is silencing anyone who dares question the legitimacy of this farce they call democracy. I know, it’s a republic, but I am so tired of explaining that to people I might as well give in and join them in ignorance.
I will not vote again; they’ve made it abundantly clear that my voice doesn’t matter. Whatever irrational, suicidal lunacy the nanny states thinks is best is what I’ll get. What it decided I need is a geriatric pedophile who shouldn’t be charged with anything more rigorous than choosing between tapioca and rice pudding at the old folks home, and a casting couch skank who rails against racism while being a descendant of slave owners.
I’m free to dismember a baby in my womb and kill it because “my body my choice”, but God help me if I won’t cover my face with a germ laden Linus-worthy security blanket or refuse let them inject genetically altering chemicals into my body or my child’s. I can be doxed, fired, shunned and destroyed for daring to venture that there are only 2 genders as proven by DNA, but a disease with a 99+% survival rate for most humans is a deadly pandemic worth murdering an economy over. Because science. Idiocracy is real, and we are living it. Dr. Lexus would be an improvement over Fauci.
I am done. Don’t ask me to pledge to the flag, or salute the troops, or shoot fireworks on the 4th. It’s a sick, twisted, heartbreaking joke, this bloated, unrecognizable corpse of a republic that once was ours.
I am not alone. Not sure how things continue to function when millions of citizens no longer feel any loyalty to or from the society they live in.
I was raised to be a lady, and ladies don’t curse, but fuck these motherfuckers to hell and back for what they’ve done to me, and mine, and my country. All we Joe Blow Americans ever wanted was a little patch of land to raise a family, a job to pay the bills, and at least some illusion of freedom, and even that was too much for these human parasites. They want it all, mind, body and soul. Damn them. Damn them all.
Frustrated by US unilateral sanctions under the Trump administration, the European Commission is reportedly working on a plan to assert its financial and economic autonomy and limit the bloc’s reliance on the greenback.
In a policy paper set to be adopted as soon as next week, the European officials highlighted that “global financial markets are too reliant on the US dollar,” the Financial Times reported on Saturday citing the document.
Given the lessons of the pandemic, Brussels is looking for ways to strengthen global positions of the euro instead. The broader use of the single European currency in financial markets may “shield the economy from foreign exchange shocks,” secure the resilience of the international monetary system and make the global economy less vulnerable, according to the draft. The measures to promote the euro could include a review of EU regulation of financial benchmarks, encouraging them to be denominated in euros instead of the dollar basis, among other measures.
The rule can be still amended before its official release scheduled for Tuesday, just one day before US President-elect Joe Biden’s inauguration. While European officials earlier said they hope for cooperation with the new US administration, the plan signals that they were at least getting ready for the worst.
The paper highlights that Brussels is concerned about its “vulnerability” to the US extraterritorial economic restrictions, as was seen in the situation with Iran after Washington abandoned the multilateral nuclear deal and reimposed sanctions against the Islamic republic. In an attempt to save the accord, officially known as the Joint Comprehensive Plan of Action (JCPOA), the EU had to come up with a special financial mechanism to facilitate trade with Tehran.
Speaking exclusively with National File on January 7, Constitutional Attorney Ivan Raiklin explained that President Donald Trump’s “only option” to defend the Constitution is to “activate the Emergency Alert System.” This comes as Big Tech companies have banned President Trump and many of his supporters from using their platforms just days after Congress certified the fraudulent Electoral College results on January 6.
He also pointed out multiple Constitutional violations by states, Congress, and Vice President Mike Pence.
“Everyone consummated the violations to the Constitution across the board,” said Raiklin.
According to Raiklin’s legal analysis, the states violated the Constitution on December 14 when they sent their slates of electors to Congress.
You had the fraud going on at the precinct level. The states violated Article 1, Section 4, which is time, manner and place of running federal elections. They went outside those bounds.
Then Article 2, Section 1, Clause 2, the states violated that component of the Constitution, which is the Electors Clause, because they didn’t select their electors in the manner that the state legislatures mandated under their election laws.
Then you have Article 4, Section 2, which is the Supremacy Clause of Constitution, meaning that the Constitution and federal laws supercede any state laws in contravention to that federal law, by running their elections in the manner that they did and it goes alongside of Article 1, Section 4.
Also, they violated the 14th amendment, the individual folks that legally and legitimately voted, because their votes were diluted by the fraud. It could’ve only just been one dead person, at the end of the day it occurred and they need to have pristine elections, and that’s not what happened.
He also said that Vice President Pence violated the Constitution on December 23, by not sending a letter to those states, demanding that they correct the fraud. As National File reported, US Code actually prohibited Pence from accepting electoral votes from fraudulently certified states. Additionally, Raiklin said that Pence violated the Constitution a second time on January 6 by “not setting up an environment to correct the fraudulently certified electoral slates from these six contested states.”
“The United States Congress yesterday, facilitated the violation of all those parts of Constitution and in addition to that, they violated the 5th amendment, the Due Process clause, because the 5th amendment applies to the federal government. I’d argue that they also violated the 12th amendment, the manor that they voted in the House on the objections,” said Raiklin.
According to Raiklin, these Constitutional violations, along with the extensive censorship of the President by Big Tech and Big Media, who are still protected by Section 230 “courtesy of the Senate Republicans,” has left President Trump with one last option – activating the Emergency Alert System.
“His only option in order to be able to defend the Constitution is to activate the Emergency Alert System, to be able to convey his message to the American people across television, radio, internet, and phones, since he’s being banned on everything. In that message he needs to lay out the case to America that we are being attacked by foreign adversaries, particularly China, in terms of cyber. There’s also a Russian and Iranian component. I’m saying this with a high degree of confidence, based on all the reporting that I’ve seen, and it’s all unclassified,” said Raiklin.
“He needs to lay out the case of a foreign attack based on national security grounds, which is what you’d usually use the EAS system for, and articulate that under the framework of Executive Order 13848.”
Raiklin recommended that the President take his time and “articulate everything,” and to “use the entire executive department, declassify things that you need to declassify, to let folks know.”
“Because there is an insurrection going on inside of the entire government, funded, supported and fomented by foreign actors, he needs to lay out that case as well, of any evidence of that,” said Raiklin. “Why would Nancy Pelosi call for an impeachment of the President when he specifically said there was going to be a peaceful transition, with less than two weeks remaining, saying they will impeach him unless the cabinet throws him out of office using the 25th amendment?”
“There must be something that will implicate her, that is already in the hands of the President, and she needs him out of office to not be able to activate the Emergency Alert System, to communicate to America what she is also potentially complicit in. There is something there,” said Raiklin. “That something may be somehow associated with Eric Swalwell being on the intel committee, and his relationships that have been exposed recently of potential ties with China.”
Raiklin noted that it would be strategically advantageous and possible for China to co-opt US politicians, such as California Representative Eric Swalwell, Georgia Governor Brian Kemp, New York Governor Andrew Cuomo, and California Governor Gavin Newsom, in order to “influence their decision making in a manner that is most favorable to Chinese interests.”
“It is my assessment that there is a potential nexus there, from what I’ve seen, that’s worth looking into further, in auditing these individuals on their ties to foreign connections, potentially, foreign intelligence services and foreign governments. Unfortunately we don’t have a FBI that does that.
One of the reasons that they don’t do that, I would suspect, is that the committee that has oversight over the FBI has an agent, potentially, of its own, that would apply pressure to those same agents that would be investigating them, ie: Swalwell on HPSCI, the House Permanent Select Committee on Intelligence.”
Raiklin said that the President’s main focus should be restoring election integrity in the United States, regardless of the politics. He recommended that President Trump use the EAS and “activate federal forces under the Insurrection Act, send them to the swing states that violated the Constitution, and tell the state governors that those federal forces will remain in place until the state legislatures actually vote on an electoral slate of their choosing.”
Such a move would force states to conduct their elections in the manner that is consistent with Article 2, Section 1, Clause 2 of the Constitution, “which they have yet to do,” according to Raiklin.
“In terms of the US Constitution, I’ve sworn an oath several times in my career, and that thing doesn’t expire. It is my obligation to advise the President that he has also taken an oath to defend the Constitution. Right now, under these circumstances, that is the only mechanism that he has legally,” said Raiklin. “It would be Martial Law in those states until the those legislatures actually voted and complied with the Constitution.”
“It wouldn’t be against the people. Let me frame it this way, it would be solely deployed to those state Capitols, like the actual Capitol building, to make sure that the legislators voted how they wanted to. It’s not coercion.”
If the states certified Biden as the winner after this, Raiklin said that he would be willing to “accept the results of the election as being Constitutionally valid,” even though he would still have his doubts as to whether or not the underlying ballot numbers were legitimate. This would “require further litigation and audits of ballots and machines, which the President must seize and have the Military” conduct a forensic audit for “foreign ties” in order to address these doubts, according to Raiklin.
National File has learned that Raiklin banned Twitter from all of his devices, and is also in the process of deplatforming Apple, YouTube, Amazon, and Google in the coming hours. Additionally, Raiklin has demanded that Parler move off of Amazon Web Services by midnight on Sunday. Raiklin continues to allow Gab and Telegram to broadcast his content, and will return to Parler when they fully move off of AWS.
“Almost anything is better than paper money. Any fool can run a printing press.” – Nelson Bunker Hunt
A year ago, the phrase “gamma squeeze” would have caught many of Wall Street’s most astute investors off guard. Today, both traditional and social media regularly parrot the phrase. It won’t be long before the shoeshine kid tells the Bank President about his gamma squeeze exploits.
A Gamma squeeze is just the latest innovation in centuries of market manipulation schemes. Given this activity is a source for significant volatility and instability, it is worth exploring.
Before continuing we share a recent tweet from Chris Cole at Artemis Capital.
Think about his powerful statement for a second. Essentially Chris states that stocks are now a derivative of a derivative of stocks. That is an absurd figment of our imagination.
The Hunt Brothers
To provide historical context on market manipulation we look back at an asset squeeze for the ages. In the 1970s, the Hunt brothers, Nelson, Lamar, and William, had extensive holdings in oil, real estate, cattle, and sugar. Concerned about the effects of what they believed to be careless monetary and fiscal policies, as well as risks of the newly formed oil cartel (OPEC), they set out to hedge their businesses and assets. Since it was still illegal for individual investors to own gold, they chose to hedge with physical silver.
The Hunts began buying silver in 1973, acquiring futures contracts equivalent to 55 million ounces of silver. At the time, the price of silver per ounce was $1.50. Over the next six years, the Hunts grew their holdings to well over 200 million ounces, worth more than $4.5 billion.
By 1979, their activity prompted actions by the Commodities Futures Trading Exchange (CFTC) and the Chicago Mercantile Exchange (COMEX). Both entities sought to restrict their buying and forced liquidations. Silver nearly hit $50 per ounce in mid-January 1980 and then fell to $10 per ounce by the end of March. At that point, margin calls on futures contracts and borrowings against existing silver holdings depleted all of Hunt’s cash. They were forced to liquidate silver to cover margin debts.
Leverage Builds and Leverage Kills
The Hunts initially took physical delivery of silver and did not use leverage. Over time though, they understood the power of using their silver as collateral to buy more silver. Buying silver futures on margin meant they could influence the price at a fraction of the cost.Such leverage allowed them to multiply their purchasing power and drive silver prices higher. The only demand on the Hunt’s was to have enough cash to fund their futures margin account adequately.
In addition to the CFTC and COMEX efforts, the Federal Reserve also played a role in breaking the Hunt brothers. Fed Chairman Paul Volcker sharply raised interest rates in January 1980 from 11.75% to 20.0% making borrowing for the Hunts much more expensive and difficult. One week after the Hunts shut down their silver market activity, Volcker began lowering interest rates.
Leverage allowed the Hunts to distort the price of silver, but it also killed their scheme. They lost over $1.1 billion on the trade. They also lost civil charges, which in part led them to declare bankruptcy.
The Tiffany advertisement below describes the economic effect the Hunt’s had on various industries.
What are Delta and Gamma?
The Hunt brothers used leverage and brute force to corner the silver market. Today’s traders employ a more refined technique but one that relies on leverage.
The “Gamma Whale,” which many think is Soft Bank, provides a lesson on how a gamma squeeze operates. Before explaining the scheme, we define option Delta and Gamma.
Delta quantifies the rate of change of the options price per the change in the underlying stock price. A delta of .50 means the option price will increase 50 cents for every $1 in the stock.
Delta is not a linear function, meaning it will not change proportionately with the stock price. Gamma quantifies how Delta will change per the change in the stock price. The chart below shows the non-linear “S-like” shape of Delta and the Gamma curve that warps it.
Options trade on leverage of sorts as a relatively small option premium can control many shares. In most cases, the premium is a tiny fraction of the price of the underlying shares. However, if the option is in the money at expiration, the option’s holder takes delivery of the underlying stock and must pay fully for the shares. In most cases, options traders sell the option or roll it to a future month to avoid payment.
The Gamma Whale
The “Gamma Whale” owns a portfolio of stocks. Like all investors, they want the value of their stocks to rise. To better their odds, they buy short-dated call options on stocks they own. Like the Hunts use of silver futures, the Whale can more efficiently manipulate share prices higher using the leverage in the options market.
A Gamma squeeze relies on the hedging actions of options dealers. The banks and brokers who are the largest sellers of options must hedge their trades. Most dynamically hedge, meaning they frequently adjust the hedge amount according to the Delta of the option. If the Delta is .35, then they buy 35 shares for every option contract they are short. If the Delta then rises to .40, they buy five more shares. Conversely, they sell when the Delta falls.
If the Whale buys enough calls, they can trigger a Gamma squeeze. The option purchases force the dealers to buy the stock, which pushes the share price higher. As this happens, the dealers’ buying activity increases the Delta at a non-linear rate (gamma). In circular fashion dealers then must buy more of the stock, and on and on.
Like Hunt’s strategy, this one works as long as you can keep buying calls, and the stock price keeps rising. As the Hunt’s found out, that is not always possible. Here are a few problems the Whale and others face.
If they elect to sell the calls, the dealers will also sell the underlying stocks, which hurts their underlying large share positions.
The popularity of such strategies results in increased options premiums, making it costlier to execute.
Since they do not take delivery of the underlying stock, they have to continue to roll the positions until they sell the underlying stock. Again, selling the options will force dealer selling. Further, there are times they may not want to buy or roll calls, such as heading into the coming election or at quarter/year ends.
Dealers will get tired of being on the losing end of a trade and purposely push stock prices lower. Lower prices have the reverse effect, as dealers must sell when deltas decline.
It is also worth considering; the Whale can short a stock and then buy puts to create a squeeze but one that pushes share prices lower.
Summary
Hunt’s scheme failed because they relied on leverage. The Gamma squeeze also depends on leverage and the willingness of important market participants. If the cost of leverage goes up or the intermediaries in the trade become reluctant, then the music of the gamma trade will stop.
Once the Hunt’s began using leverage, they gave the “game” back to the establishment government, banks, and the Rockefellers.Like the Hunt brothers, the Gamma trade squeeze relies on the banks to lose money. As the Hunt brothers can attest, do not bet against the establishment, the banks, and those who sponsor them (Fed, Treasury, etc.)
Equity prices and valuations have lost all relationship to economic reality. Gamma induced surges are yet another example of the false market foundation. Ignoring the inherent risks may be pleasant when the market rises, but at the same time, instability soars. We urge you to look back at the silver chart to indicate what may happen when reality remerges.
