When Genius Fails: Hedge as the Debt Ceiling Looms

Yo Pit Crazies,


My week started off great!.


My week started off great!.


Well, sort of…


Exxon Mobil (Ticker: XOM) is going through the roof as the materials squeeze gets back on and natural gas and oil prices explode. I locked in a 50% win and can still hold some calls!


My drug stocks are not doing great. Sadness as both Pfizer (Ticker: PFE) and Regeneron (Ticker: REGN) are not well. My little fund is just even on the day.


Now a walk back through history …


When Genius Failed is a great book and goes into detail about Long-Term Capital Management and how that blowout affected markets during the biggest bull run in history. 


The fund had the co-inventor of Black-Scholes model and one of the greatest Wall Street traders of all time. They blew out sky high.

More on that in just a minute …



Speaking of Genius, our own trading wunderkind Mark Sebastian will be talking flow TONIGHT when he reveals Big Money’s Big Secret — and how you can stack gains behind it.


Be sure you’re there to receive a free Big Money trade and a shot at a free year’s worth of an Option Pit program.


Register now for no-cost.



Allocation is key


The short answer re: Long-Term Capital is they were overleveraged. LTCM even made investors take money back in the Spring of 1997 as they wanted all the returns for themselves.


UBS sold the cheapest put in history to LTCM owners just for a chance to invest in the firm. Note how risk control in big Swiss banks has not changed much with the recent Credit-Suisse (CS). I digress.


LTCM had three big trades on and I remember them like they were yesterday because it was a crazy week for me.


      • Long Russian and emerging market debt/short US government Treasuries
      • Short SPX vega at a 13 VIX level (10-of-millions in vega)
      • Massive Risk Arb in Tellabs and Ciena takeover, long Ciena short Tellabs but this is fuzzy

Looking with perfect hindsight, these were probably the worst positions to have in late 1997 and into 1998. A total mess and these guys were literally the smartest guys on the block.  But they lacked a risk control chief who could pull the plug so …


      • Emerging market debt went to 0 and US government Treasuries went to the moon
      • SPX IV went to the 40s
      • Ciena/Tellabs takeover went to 0 with risk arb totally inverting where LTCM was the biggest single loser.


No matter how smart you or I think we are, you never know what can happen.


At the beginning XOM was in the can but my drug stocks held up. I closed the puts I could in XOM.


Then the market changed its mind, but I am still even for now. At least I had things allocated correctly. Since I closed some XOM profits, I am giving the drug stocks a chance to make some money for the Capital Gains portfolio.


The Lesson: The debt ceiling talks loom and usually VIX holds a bit through the week.  Keep that in mind going to Friday. Ya never know — ask LTCM.


The Rundown

Capitol Gains w/ Frank Gregory
Option Pit DC and Wall Street insider Frank Gregory and I run a portfolio approach to trading options with stocks that have good long-term prospects based on Frank’s K Street knowledge and my options expertise.

      • Our Exxon Mobil  (Ticker: XOM) trade is up at least 50% and — currently up 100% on the marks, with a long call still to close.
      • Guggenheim Solar ETF (Ticker: TAN) is making a run back up with the trade near even.
      • For Regeneron (Ticker: REGN) and Pfizer (Ticker: PFE) I might need some adjustments moving forward.


Robinhood Trader:
Option Pit CEO Mark Sebastian uses the Robinhood Gamma Radar to find order flow in active names.

      • Mark is rolling with some Ford Motor Co. (Ticker: F) upside calls that are up 40% so far.


Pro Trading Room:
The Pro Room is Option Pit’s live access to Mark and myself during trading hours. Our Pro students post trade ideas with Mark and me during the entire trading session. 


The Pro Room sentiment is still bearish VIX/VXX/UVXY 4 days in


Cat grabbed a Mark idea:



To Your Trading Success,



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