Pinning, from Tom Larsen

October 21, 2007 | 1 Comment

PinIn the 1970s I worked for OCC. Every expiration, we spent all day working with employees from OCC member brokers, retrieving exercise instructions from them for everything that was in the money. We would run two batches, and usually it would take all day because many people had to be called regarding their exercise instructions. Then OCC hit on the idea of having "automatic exercise" thresholds. At first, they were 75 cents in the money. So people signed disclosure documents authorizing this in their accounts. Before that time, there were all these phone calls employees had to make to find out if the customers wanted to exercise their options and the answer was always, "of course," because by Saturday, what else could you do? Over time, costs fell and so did the threshold.

It is frequently a good idea to totally avoid this threshold issue, by taking advantage of the fungible nature of listed options and trading out of them, which also prevents "pinning" the stock at the strike which can create havoc with a complicated position. For example, you might have to guess whether you should exercise a long to offset an expected assignment on a short that may or may not occur.



A property statistics observation, prompted by this item:



How much of the statistical weakness in house prices is related to utter freefalls in dead-end places like Detroit, Cleveland, Buffalo, etc., pulling down the averages?

Average income in Manhattan is a truly meaningless stat, as both seven figure compensation and welfare checks are common here.

What about "average" house prices, lumping together entire neighborhoods that are bidless along with suburban stretches just "giving back" the last couple years of appreciation?

Is this a meaningful distortion?

Tom Larsen remarks:

FlintI look at houses on line from time to time in Flint, MI. I look at my old neighborhood, and the houses are still going for the price my Dad sold his for in the 70s. The main difference is the factories are gone and the people are poor. Oh, and there weren't any drive-bys when I was growing up. You got beaten up, but no shootings. A house two blocks from where I grew up is listed for $25,000 on Zillow. At least it's not a dump. Maybe someone could make money buying these places. I'd live there (though my wife wouldn't), except I moved to San Francisco many years ago, and let's just say Flint is short on the amenities I enjoy here. Michigan has always been my "put" — if we run out of money, we will have to go back there.






Tom Larsen adds:



Alan Millhone adds:







 In a follow up to Mr. Sasmor's wonderfully enlightening Youtube post simplifying economics, a friend shared his thoughts with me on all the things that could go wrong in the markets. After reading this, I know for sure that we're heading to Armageddon!

Or maybe we can all just realize that there is always something out there to get the bears excited about impending doom.

Possible problems:

The potential for derivative crises
The bird flu
The next hurricane season
The Japanese demographic tsunami
Low risk premiums
Corporate profit margins at record levels
Poor US performance in math and science
Iranian nukes
Iraq war
Terrorism here and abroad
The federal budget deficit
The national debt
High consumer debt
The return of high inflation
The housing bubble

The credit bubble
The oil bubble
The commodities bubble
The coming crisis in Social Security
The US demographic tsunami
Oil supply risk
The bubble in San Francisco real estate
Oil at $100/barrel, natural gas prices
Global warming
Global cooling
Rising long term rates
Rising short term rates
Falling US dollar
Asset Inflation
Asset Deflation
The European demographic tsunami
Consumer spending post-asset bubble
Consumer spending if assets keep inflating
Exogenous events
Global imbalances
Foreign surpluses

US consumer stretched to the breaking point
The bond carry trade bubble
The unwinding of the Yen carry trade
Overvalued US stocks
The "house of cards" US financial system
The condo bubble in Miami and Las Vegas
The Chinese demographic tsunami
The hollowing of US manufacturing
Ports owned by Arabs
Reckless fiscal policy
Wage stagnation
The health care crisis
The bankruptcy of GM and Ford
Declining productivity
The impending increase in volatility
The yield curve inversion
Negative US savings rate
Corporate Malfeasance



Pi, from Tom Larsen

March 5, 2007 | 1 Comment






Bernd Dittmann adds:








With this last year's crop of parchment back from the millers in the form of fresh green beans, the old Zach and Danni (now known as Nesco) coffee roaster bit the dust, and in shopping for a new one, discovered a good review of roasters here. I decided on a programmable I Roast 2. The review says that Nesco did not do a good dark roast as well and was a bit slow making a 'dead' cup, which I did experience with the Nesco. In the meantime, roasting is done on the Wok on the stove. Cast Iron fry pan is what the old time farmers used and it gives a very complex flavor but kicks off some smoke. The fry pan allows graduated programmable roast also, but requires standing there stirring the beans. Hopefully I will have heavenly coffee, better than a millionaire's money can buy. Fresh roast is the best way to go.

Alan Millhone writes:

Interesting article. My Daughter likes to grind her own fresh coffee and likes Caribou for grinding. My Wife and I are lazy and have been members of Gevalia for a number of years. Each month we get our standard shipment of 4 to 8 oz. boxes.

Every so often we get an additional special of some coffee. In front of me I have Maragogype from Mexico, Papua New Guinea, and Antigua that have come as additional shipments. Recently from Gevalia we got a nice coffeemaker and two boxes of coffee for $10.00. Another time or two I notified them that our pot went on the blink and we were shipped a new pot for no charge. They also sell teas, but to date have not tried them. In Belpre this morning the wind chill was three below zero, and I am currently having a cup of Bigelow brand Constant Comment tea :-) . It's an old favorite of my grandfather's and mine. He started me drinking it many years ago. I readily admit there is nothing like the aroma of fresh ground beans being brewed. My best friends are Greek and they like Bravo brand of coffee from Greece. 

Tom Larsen adds:

On vacation in Florida this week, I was driving on I-75, yawning like crazy. I knew I needed coffee and MCD saved me. I didn't even have to get out of the car to buy it and I thought about the Chair's earlier post about McDonald's coffee. I would have had some food too, if my wife weren't with me!

James Sogi reports:

Reporting back on the new coffee roaster, I-Roast-2, which produced a beautiful cup, roasted to perfection medium dark with a hint of sheen. Highly recommended over Nesco. What is interesting is that it has different programmable temperatures for first crack and second crack and finish so the oils don't come out too soon. It came with a nice variety of exotic green beans from Sumatra, Peru, Guatemala, Mexico, East Africa, Timor, so it will be fun to try the different varieties. The roast finished in less than 15 minutes, as coffee should not roast longer at the risk of getting flat. 



 Denny's is my kids favorite restaurant. They've noticed that the Denny's by our house is always at least 1/2 full, or more, no matter when we go. David seems to think that they have a steady clientele that is growing.

The kids like the fundamentals they've researched from the analyst.

They think the food is good, served quickly and has catchy names (Moon's over MyHammy … who can argue with that name … and Hunter likes the kid's menu).

Mr. Russell (their teacher) likes the senior menu (Mr. Russell bought Denny's in his trading portfolio two weeks ago).

David is very excited about doing this trade, but I told him we should do more research. He said, "Let's ask the spec list, they'll know what to do" (who can argue with that)

So … what is the list's opinion of Denny's?

Tom Larsen replies:

Maybe the kids should try to find someone that doesn't like Denny's and ask why.

Maybe the kids could estimate what it costs to make a specific meal at Denny's and then compare that to the price. They could count how many customers are in the restaurant. They could see what people are eating. Maybe they could have a short conversation with the local manager about how he manages the restaurant.

They could learn about the different jobs at Denny's. They could learn what a franchise is. They could also think about the company's advertising and whether it works or not. They could try to determine which restaurants are "the competition," and test the food at these establishments as well. This research could get really expensive, Scott, but if you are taking kids out to eat, Denny's is a good place to go.

David Wren-Hardin Adds:

I would have them analyze the upcoming increase in minimum wage and its possible impact on Denny's costs.

Martin Lindkvist Suggests:

 The stock could work great, but I would ask one more question: Do other investors already know this, and is it discounted? By discussing whether a restaurant that stinks and has bad food actually could be a better investment one stands a better chance not investing in something that "should" work great but that others have already invested in and driven up the price. Compare with Birinyi Research that just showed that the five least liked companies by analysts (Dow components) beat the 5 most liked by analysts in each of the five or so last years. They also beat the average of the thirty years. As I said, it can be a great investment, that restaurant you are discussing, but I think the discussion could give more meals for a lifetime including expectations.

J. T. Holley Contributes:

 A few years ago when I got to go to one of those “pat on the back” conferences w/ Paine Webber they had Lou Holtz come speak. He spoke to a crowd of folks that more than most liked modern portfolio theory and randomness. The best part was when he started to speak about investing and speculation. One day back in the 70’s or 80’s a guy asked him if he’d like to invest in a McDonald’s franchise. Lou said that he had been plenty of times but went by one that night and had a meal. He looked up at the Arches and underneath it read at the time “Millions Served”. He thought at that time that it had saturated the marketplace and probably wasn’t a good investment. Now the sign reads “Billions Served” so he said take that for what his skills were worth in speculation.

The other thing Lou mentioned in the spirit of “Racquet Sports” was when he came onto campus one day when Rocket Ismael first came to Notre Dame. He said that he knew Rocket was going to be one of the fastest players that he’d ever coach when he looked over and saw him playing Tennis. After a subtle pause he exclaimed “by himself”. I’ve probably missed out on a ton of good companies in my short investment life so far, but I had an older man tell he upon entering the “Speculative” business to stay away from Airplane, Restaurant, and Mining stocks and to this day I’ve done that (untested out of blind obedience to the unnecessary fixed rule to obey your elders).

Scott Brooks further adds: 

I just thought I'd update the group on the Brooks Kids Question on Denny's from the other day:

David is driving me crazy. He wants to buy Denny's stock and buy it now.

He is very excited about making this trade. He is cajoling, pushing, negotiating … and just short of begging me to make this trade for him. He has made up his mind and wants it now … however, I want him to wait.

I've told him that we need to do more research and figure out if this is a stock he wants to buy. He says, "Dad, you buy stocks a lot quicker than this … you don't spend this much time doing research …".

Of course he's right. I pull the trigger a lot quicker. But, as I've told him, I've been doing this a long time and I think I have a pretty good handle on what I'm doing (or at least I'd like to think I do).

I've told him that we need to wait until he gets more questions answered about the stock. I've told him that this is going to be a research project for him and the other kids. They should research this out, prepare a list of vital questions and get them answered before making the trade … or not making the trade … (as I've tried to tell him, some of the best things I've done in investing are the trades I didn't make).

But still he wants it. I've decided to wait and make him and the other kids do their research. I've concluded that it will be of more value to them to learn the details of the process (from the fundamentals on up) than to just make the trade on a little more than a whim and then see what happens.

I was tempted to let them make the trade, but decided to wait. I am not so worried about them making the trade and then losing money … I think that would teach them a great lesson. I am worried about them placing the trade and then making money … I think making money on a poorly planned and thought out trade would be far more detrimental to them.

So the trade waits for the research to be done.

Russell Sears adds:

Perhaps I missed the post, but did anybody else suggest counting, besides fundamental analysis?

While complex stats may be beyond the young ones, reading a chart and then doing some math on money should be a clear lesson when it is their own money.

A quick look at DENN max on yahoo shows they tanked big time in '98 to mid 2000 from $10 to below $1, apparently after recapitalization due to heavy debt.

You should have them count what could have happened back then.

Also I would suggest that you mark the dates of their ten Q release on the chart for the last ten quarters.

Perhaps stat significance is beyond them but I think the ideas can be grasped with some visual help. 



I am attempting to consider the analysis of jokes, e.g. James Lackey’s often stated “…get the joke…” as an aid to market analysis. The work of Arvo Krikman on Contemporary Linguistic Theories of Humour has been helpful. He divides this analysis into:

  1. Incongruence theories; the intersection of two different planes, incongruities, contrasts.
  2. Linguistic theories; those based on similar phonics or normal interpretations.
  3. Freudian theories; those based on the theory of the effect of humor on the recipient in allowing release.

There are many events associated with markets that make one wish to roll on the floor with laughter. The selling out at the exact low, the attempt to make a profit without risk, the guarantees of profit, the attempt to make money the usual tested way that leads to oblivion because the cycles have changed, the assurance that the fund is in great shape the day before it fails, the loss of an estate built up over 60 years with one trade, the failure by one tick to make a good profit with a limit order, the trader that calls you with a seemingly good bid or offer that you trade on right before a number or news event or earnings report terribly against you that its 99% they knew about when making the quote, the change in position based on an economic number that’s completely random, ephemeral, and certain to be revised in your favor as soon as you get out, the market move that occurs way before the news, the constantly one sided analyst who explains every event, no matter how improbable as supporting his view, the forecasters who can’t forecast, the Chinese Wall that supposedly separates the buy and sell side and advisory role of Wall Street, the constant backdrop of explanations for the market moves and reasons to extricate from positions when buy and hold would be so much more appropriate, the shooting stars and falling comets, the attempt to couch a bearish sentiment in bullish terminology, the profits that can come from disaster and the losses from triumph, the inevitable fall from the top of yesterdays superstars, the inevitable results of overconfidence, the tweaking from the recommended 60% weighting in stocks to 58%, the flimsiness of the foundation for many runups or rundowns, the executive of the public company that chisels a hundred bucks on his expense account or dating of options when his salary is $100 million a year, the investments that’s made partly for reasons that make one unpopular in the hallways of the service that you lose your entire stake on, the commentator that’s always bearish who relies on the broken clock to be right once, the fundist who hits the top when his sector finally goes his way and receives great public acclaim for it.

All this humour, and so much more, which I call upon readers to contribute, calls out for a general theory of market humour which is falsifiable and predictive, and helpful to the trading process.

I am more partial to a mathematical theory which strangely I haven’t seen, i.e. most of humor seems to be based on two events in some sort of probabilistic relation to each other- contrasts, collisions, unusual couplings, ambiguities, startling events et al. usually of a pithy nature. That’s it. When an event A given B is highly likely, P(A|B) is near 1 and B occurs and not A occurs or P(A|B) is near 0 and B occurs and A occurs, that’s usually the foundation of humor. Alternately if P(A|B) is much higher then P(A|C) and A occurs, but even though it’s much more likely that B occurred, C really occured, then that’s another Bayesian revision sort of humor. A linguistic aspect of humor typified by the bronchial joke must also be considerd. That’s the joke where a very attractive young man with a bronchial condition knocks on the door of his Dr.’s house and whispers to his very attractive young wife, “Is the doctooor in?”. “No, come right in she says”. That would be typified by P(A|C) is much higher than P(B|C). C occurs and then B occurs but not A.

J.T. Holley responds:

The one that jumps out to me is the old formula that is not defined but given as:

Tragedy + Time = Comedy/Joke

The key being what is the definition of a tragedy and equally important what is the appropriate time elapsed?

Looking at 1819, 1837, 1906, all the “Black Days” in ‘29 - ‘32, Oct. ‘87, 10/27 in ‘97, ‘98 Ruskie, the Internet Debacle ‘00-’02, one would say that we have had our tragedies. Throw in the Hunt Bro’s, Nick Leeson, and now Brian Hunter and you have more to poke at, but is it appropriate? Is the punch line the drift that the Mistress gives? It ain’t funny when you lose, especially money. The further we do get away, time has a wonderful way of healing due to our tenacity to come back. The bear camp doesn’t see the tragedies as lines in the joke; they don’t even get to laugh with giggles of resiliency?

I am so glad that I have the Holley genes that makes me have a love of peanut butter on my pancakes, and a smile on my face. This has always been thrown back at me as a sign of not being serious about life, but I can’t act or see life any other way than as Nock stated “as it is” with that smile.

Jimmy Buffet wrote the line “if we all couldn’t laugh we’d all go insane”.

I was thinking that the opposite of the formula above is also a wonderful joke the market provides if you have a sick sense of humor:

Comedy/Joke + Time = Tragedy

How many think they can trade/speculate but really haven’t any clue and submit their money to the Mistress? They give and as Vic states “lose more than they have any right”. This is the sickest of sickest jokes involving the markets due to the plethora of examples many more times than that of Tragedies listed above. Maybe that’s a key to those that have been Body Snatched? They aren’t aware of the part they play in the joke?

Sushil Kedia adds:

  1. Newspapers : All newspapers that cannot refrain from offering explanations of market moves post-facto. Particularly the electronic screen famous for its dark- back ground-orange text, despite its outstanding analytical tools.
  2. Experts: Columnists, newsletterists, bar-waitresses, friendly cabbies all espouse opinions worth only the size of their exposure to the markets. The world doesn’t want to get the joke because the formal from such ones are the experts who are selling ideas which as though would otherwise still be getting rich on their own.
  3. Margin of Safety : So bad that one holy grail is believed to be truly existent since the wealthiest of the the investors seems to have actually implemented this but nothing else.
  4. Insider trading regulation: the assumption probably supporting such expenditure of effort is that one day they will be able to or willing to put to end from where information on each thing begins! End the beginning? What’d be leftover then?
  5. Free markets: well to put the idea getting my mind for a while on this core issue finally a joke: girl fights up with her boy saying he is being much of an easy flirt. Boy laughs back saying, “Well, you are quite a believer in free sex. Aren’t you?” Girl yells red-eyed, “free sex! My foot” Boy says with a deep cold sigh, “well just tell me then what have you started charging ?”

James Sogi responds:

Humor has the element of surprise, the unexpected. That’s what the market gives, the unexpected. Its never what you might think it is, its always something else, something counterintuitive, not what you expect. And it knows ahead of time what you are going to do and sees you coming. Like the thread on the group mean, the group knows everyone’s secrets, for it is theirs. The market trains you to go the wrong way, feints, always gets you off balance. You need to be a step ahead, look over the horizon, over your shoulder. You can’t be a step behind, reactive, you have to lead and take the initiative. Following is too late. The reflexes are not fast enough to defend in the market, you have to punch first, and let the others in the market defend, and have that split second initiative advantage. On longer terms get that strategic edge moving the troops first,. Like lack says, don’t let the joke be on you. You have to beat it to the punch line. Why do you think its called the “punch” line? Just like a punch, the reaction is always slower. Got to beat the market to the punch, bob and weave, come in low. Keep your distance. Always protect yourself. It really not all that funny except in a self deprecating sort of way.

Tom Larsen replies:

While I was working as a no-advice broker, a Texan who had added several spreads to his option position, told me: “I got myself so I don’t know what I want the stock to do”. Maybe it’s funnier when I say it out loud with a drawl. In any case, it shows how people think they have a simple financial product figured out and then realize that they are in over their head. Some people who hear this are laughing at the guy who seems inferior, but thinking, “this could be me!” Or it could be reminding us to not get too cute with our positions. Don’t take on more complexity than necessary. This is probably just a variant of a common form of joke where we laugh at somebody who gets confused. Superiority humor?

While working as an option market maker in the pit, it was common for traders to deconstruct the trading day in the brokers lounge after the close. During one such conversation another market maker told me that during the day he had been so desperate that he “would have paid anything for those puts. Fortunately no one would sell them to me.” This is very deep for me, and reminds me that sometimes you can be unaware flying full speed toward disaster, and the only thing that saves you is grace. and it reminds me not to panic. This joke is probably funny because of the reversal implied as the speaker is clearly aware of his good luck. It’s like the feeling you get when you tell someone about the near collision you avoided on the freeway. There is a release, relief and relaxation at the end.

James Lackey responds:

Why did god make chartists? To make weather men look good. The mistress of the markets can make traders look so foolish at times, it is much better to laugh than to cry. Your only as good as your last trade. However, your next trade might be your last, make it a good one.

The worst market jokes are those that everyone has known for years. The market makes “you feel” like a child. You start your joke to friends: a priest, Jesse Jackson and Clinton are all on an airplane that is about to crash. Your Dad, the old man immediately chimes in and crushes your joke “only two parachutes get back to work!” They have heard them all before.

The joke is “housing is a disaster, the consumer is all tapped out” the news tape blinks Bulletin: “US Housing lowest level in 30 years.” The market immediately goes to the punch line. The old codgers come in, at the market “take it and bid it.” The time and sales boys say “my limits never get filled all size trades the offer all day, who knew?”

Perma bear brain teaser: Bond prices fall as traders sell bonds to buy relatively cheap US stocks.. .interest rates rise, consumer sentiment falls, bonds rise on slowdown fears, stocks rise due to lower interest rates and future uptick in consumer spending, bonds fall as traders sell bonds to buy stocks. Market rallies 6 weeks in a row on short covering.

We watched Yes Men last night. The movie is a Sundance comedy. A couple of jokers start a website to mock the WTO. To their delight no one actually reads the website and offers them speaking engagements. They mock “free trade” and the “government of, by and for the corporation.” Their last speech they had to regrettably cancel their presentation to Australian accountants. Their reason for a program change was the WTO was to be disbanded. The post interviews with the seminar participants was hilarious. “its great to see an organization admit their faults, scrap the program and restart from scratch.” I was laughing so hard my wife called upstairs to see if I was okay! I said yea this skit is hilarious. Now the sad joke. She says, “that is good Jimmie, that is the first time Ive heard you laugh in 6 weeks” yes Jennifer as you have heard, the markets were strait up for 6 weeks.

About two weeks into the fall rally, the headlines read Ford Motor company might go private. All the talk of how bearish and difficult SBOX is for public companies we thought, wow a double bullish whammy for the indexes. IPOs are far more difficult, the cash flow rich, no growth, dead money stocks are going private, a simple reduction in supply. All that index money must be reinvested in the market. Ill buy the next pull back. What if there is no pullback? Joke is first down move was after a huge “made in China,” bank IPO.

Speaking of Chinese stocks…Is it possible to make an ETF of Chinese stocks that are unregisterable on the NYSE, yet float the ETF as a “Chinese investment”. Oh the joke is an ETF on private equity.

The daytraders joke they are never right, why bother? The funniest joke is everyone can be right if they wait long enough. You might go broke waiting, but eventually you can be right. Funny debate between admitting your wrong or the market is right vs. your right, just too early. Of course we strive to be rich rather than right, until your rich, right?

The worst market joke. Get even post from Mr. Clive. From the Yra Harris interview….Inside the house of Money:

The worst thing you can do in a trade is try to get back to even. I call that the “prayer trade.” I can spot guys on the floor who have it on because they shake back and forth, basically in prayer, mumbling, “oh, please God, just let it come back to me. Let me break even.” What is that? Break even? That’s a loser. I’m not in this business to break even. There’s always opportunity in the markets, so forget breaking even. If breaking even is your goal, you’re not trading anymore.

Rick Foust on traders:

Here is a short one that reminds me of some trades/traders.

Question: What is an Ohno bird?

Answer: A bird with 5 inch balls and 3 inch legs. When he comes in for a landing…

Quick followup.

I have this placard on the instrument panel of my Cessna.


Craig M. shares a market truism:

The best joke of all is that the market allows you to think you actually know what you’re doing at times, and while you may profit during these times you never ‘make enough’ and when you lose it seems even worse. The actuality is that you never really knew anything in the first place.






Vic comments:


J. T. Holley adds:



Tom Larsen mentions:




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