this thread is for posting matt levine quotes in

JPMorgan made money that it did not, you would have to say, "deserve" to make

Probably what *this* should be called.
User avatar
Rylinks
her skirt got quite a lot smaller,
but her heart is still the same
size it was before
Forum Elf
Posts: 12359
Joined: Jun 13, 2018

Re: this thread is for posting matt levine quotes in

Post by Rylinks » Mon Feb 01, 2021 5:43 pm

Benn Eifert of QVR Advisors pointed out a fun options fact on Twitter. Let’s say that, back on Jan. 21, when GameStop’s stock closed at $43.03, you thought it was wildly overvalued and wanted to bet against it. You could have sold the stock short: Borrow shares, sell them for $43.03, hope to buy them back cheaper. Or you could have bought a put option: Pay a premium, and then if the stock plunges you can sell the stock at the put strike price. You could have bought a $10-strike April put for just 33 cents: If the stock fell below $10 by April, you’d get back the difference between the stock price and $10; if it went to zero by April, you’d get back $10 for your 33-cent investment. The day before the Reddit rally really took off, the $10 puts were a way to bet on GameStop’s stock collapsing quickly and totally.

If you shorted GameStop stock on Jan. 21, you got absolutely ruined. It closed on Friday at $325; if you stayed in for that you have lost, uh, 655% of your money, oops oops oops. On the other hand, if you bought those puts, you did great. Those $10 puts, which traded at $0.33 on Jan. 21, last traded at $1.55 this past Friday. You’re up 370%. The people who bought the stock did better—they’re up 655%—but of course they were right; the stock went up. You were wrong; the stock did not go to zero, but you’re still up 370%. Good trade!

User avatar
Ashenai
Forum Elf
Forum Elf
Posts: 10522
Joined: May 29, 2019

Re: this thread is for posting matt levine quotes in

Post by Ashenai » Mon Feb 01, 2021 6:20 pm

You can fondle the cube, but it will not respond.

User avatar
Khaos
They should have sent a poet.
Forum Elf
Posts: 16863
Joined: Aug 23, 2018

Re: this thread is for posting matt levine quotes in

Post by Khaos » Mon Feb 01, 2021 6:34 pm

so even though the stock went down, the puts became more valuable because people are even more convinced it's going to hit rock bottom?

User avatar
Jeb Bush 2012
Posting Automaton
Posting Automaton
Posts: 2520
Joined: Jun 24, 2020

Re: this thread is for posting matt levine quotes in

Post by Jeb Bush 2012 » Mon Feb 01, 2021 6:40 pm

Khaos wrote: Mon Feb 01, 2021 6:34 pm so even though the stock went down, the puts became more valuable because people are even more convinced it's going to hit rock bottom?
you mean even though the stock went up?

pretty much, except it's less that people became more *convinced* that it would hit rock bottom and more that they went from thinking it was a low-probability event to thinking it was a somewhat less low-probability event. even if you assume the puts are worthless in any scenario other than gamestop literally going to zero, the value of the put corresponds to believing there's a 15.5% chance of that happening

User avatar
Jeb Bush 2012
Posting Automaton
Posting Automaton
Posts: 2520
Joined: Jun 24, 2020

Re: this thread is for posting matt levine quotes in

Post by Jeb Bush 2012 » Mon Feb 01, 2021 6:44 pm

I don't have any intuition for what the correct probability to assign to that event is but it does seem correct to consider it more probable now than it was a week and a half ago

User avatar
Doug
Has anybody seen my parrot
Forum Elf
Posts: 20552
Joined: Aug 23, 2018

Re: this thread is for posting matt levine quotes in

Post by Doug » Mon Feb 01, 2021 6:44 pm

Hey man

Got any puts


Yeah man, I got some puts, what do you need
It's your turn in Cthulhu Wars
It's your turn in Squirrel Wars
It's your turn in Demon Wars
It's your turn in Wall Street Wars

http://devilsbiscuit.com/

User avatar
Khaos
They should have sent a poet.
Forum Elf
Posts: 16863
Joined: Aug 23, 2018

Re: this thread is for posting matt levine quotes in

Post by Khaos » Mon Feb 01, 2021 6:46 pm

Jeb Bush 2012 wrote: Mon Feb 01, 2021 6:40 pm
Khaos wrote: Mon Feb 01, 2021 6:34 pm so even though the stock went down, the puts became more valuable because people are even more convinced it's going to hit rock bottom?
you mean even though the stock went up?

pretty much, except it's less that people became more *convinced* that it would hit rock bottom and more that they went from thinking it was a low-probability event to thinking it was a somewhat less low-probability event. even if you assume the puts are worthless in any scenario other than gamestop literally going to zero, the value of the put corresponds to believing there's a 15.5% chance of that happening
yes i meant up. thanks

how'd you calculate the 15.5%?

User avatar
Rylinks
her skirt got quite a lot smaller,
but her heart is still the same
size it was before
Forum Elf
Posts: 12359
Joined: Jun 13, 2018

Re: this thread is for posting matt levine quotes in

Post by Rylinks » Mon Feb 01, 2021 6:54 pm

under normal circumstances the change in the value of an option as volatility increases is given by the black-scholes model, but GME is neither normal nor Normal so the assumptions of the model do not hold

User avatar
Ashenai
Forum Elf
Forum Elf
Posts: 10522
Joined: May 29, 2019

Re: this thread is for posting matt levine quotes in

Post by Ashenai » Mon Feb 01, 2021 6:58 pm

My analysis suggests that the value of GME must keep going up to avoid falling. If it stops going up and also fails to hold its value then it is in danger of going down. HOWEVER, if it does manage to keep from losing its value in the near future, then it is a good short-term investment, due to it appreciating in value.

User avatar
Khaos
They should have sent a poet.
Forum Elf
Posts: 16863
Joined: Aug 23, 2018

Re: this thread is for posting matt levine quotes in

Post by Khaos » Mon Feb 01, 2021 7:00 pm

the more i learn about investments the more i feel like i should have gotten a math degree

User avatar
Rylinks
her skirt got quite a lot smaller,
but her heart is still the same
size it was before
Forum Elf
Posts: 12359
Joined: Jun 13, 2018

Re: this thread is for posting matt levine quotes in

Post by Rylinks » Mon Feb 01, 2021 7:01 pm

Khaos wrote: Mon Feb 01, 2021 7:00 pm the more i learn about investments the more i feel like i should have gotten a math degree
https://cs.uwaterloo.ca/~paforsyt/agon.pdf good luck :morph:

User avatar
Jeb Bush 2012
Posting Automaton
Posting Automaton
Posts: 2520
Joined: Jun 24, 2020

Re: this thread is for posting matt levine quotes in

Post by Jeb Bush 2012 » Mon Feb 01, 2021 7:01 pm

Khaos wrote: Mon Feb 01, 2021 6:46 pm yes i meant up. thanks

how'd you calculate the 15.5%?
the value of the $10 put is $10-(price of the stock at the date of the put), because it entitles you to sell one unit of the stock for $10 at that date

so even if you assume the put is worthless in any case other than "the stock is worth nothing at the maturity date", its expected value is at most (probability of the stock going to 0)*$10. so it being worth $1.55 implies a 15.5% chance of going to zero

that's not quite right, since the value of the puts is high-variance, but close enough I think

User avatar
Rylinks
her skirt got quite a lot smaller,
but her heart is still the same
size it was before
Forum Elf
Posts: 12359
Joined: Jun 13, 2018

Re: this thread is for posting matt levine quotes in

Post by Rylinks » Mon Feb 01, 2021 7:02 pm

it's just a bunch of differential equations really

User avatar
Rylinks
her skirt got quite a lot smaller,
but her heart is still the same
size it was before
Forum Elf
Posts: 12359
Joined: Jun 13, 2018

Re: this thread is for posting matt levine quotes in

Post by Rylinks » Mon Feb 01, 2021 7:03 pm

Jeb Bush 2012 wrote: Mon Feb 01, 2021 7:01 pm
Khaos wrote: Mon Feb 01, 2021 6:46 pm yes i meant up. thanks

how'd you calculate the 15.5%?
the value of the $10 put is $10-(price of the stock at the date of the put), because it entitles you to sell one unit of the stock for $10 at that date

so even if you assume the put is worthless in any case other than "the stock is worth nothing at the maturity date", its expected value is at most (probability of the stock going to 0)*$10. so it being worth $1.55 implies a 15.5% chance of going to zero

that's not quite right, since the value of the puts is high-variance, but close enough I think
exchange-traded options can be exercised at any time, which increases the value

User avatar
Jeb Bush 2012
Posting Automaton
Posting Automaton
Posts: 2520
Joined: Jun 24, 2020

Re: this thread is for posting matt levine quotes in

Post by Jeb Bush 2012 » Mon Feb 01, 2021 7:03 pm

Rylinks wrote: Mon Feb 01, 2021 7:02 pm it's just a bunch of differential equations really
gross

User avatar
Doug
Has anybody seen my parrot
Forum Elf
Posts: 20552
Joined: Aug 23, 2018

Re: this thread is for posting matt levine quotes in

Post by Doug » Mon Feb 01, 2021 7:03 pm

lol
It's your turn in Cthulhu Wars
It's your turn in Squirrel Wars
It's your turn in Demon Wars
It's your turn in Wall Street Wars

http://devilsbiscuit.com/

User avatar
Jeb Bush 2012
Posting Automaton
Posting Automaton
Posts: 2520
Joined: Jun 24, 2020

Re: this thread is for posting matt levine quotes in

Post by Jeb Bush 2012 » Mon Feb 01, 2021 7:04 pm

Rylinks wrote: Mon Feb 01, 2021 7:03 pm exchange-traded options can be exercised at any time, which increases the value
ah okay, then you can replace "at the maturity date" with "ever" I guess (or "during the lifetime of the option"? do they have some expiration date?)

User avatar
Rylinks
her skirt got quite a lot smaller,
but her heart is still the same
size it was before
Forum Elf
Posts: 12359
Joined: Jun 13, 2018

Re: this thread is for posting matt levine quotes in

Post by Rylinks » Mon Feb 01, 2021 7:05 pm

Jeb Bush 2012 wrote: Mon Feb 01, 2021 7:04 pm
Rylinks wrote: Mon Feb 01, 2021 7:03 pm exchange-traded options can be exercised at any time, which increases the value
ah okay, then you can replace "at the maturity date" with "ever" I guess (or "during the lifetime of the option"? do they have some expiration date?)
they have expiration dates, so 'during the lifetime of the option'

User avatar
Khaos
They should have sent a poet.
Forum Elf
Posts: 16863
Joined: Aug 23, 2018

Re: this thread is for posting matt levine quotes in

Post by Khaos » Mon Feb 01, 2021 7:07 pm

Jeb Bush 2012 wrote: Mon Feb 01, 2021 7:01 pm
Khaos wrote: Mon Feb 01, 2021 6:46 pm yes i meant up. thanks

how'd you calculate the 15.5%?
the value of the $10 put is $10-(price of the stock at the date of the put), because it entitles you to sell one unit of the stock for $10 at that date

so even if you assume the put is worthless in any case other than "the stock is worth nothing at the maturity date", its expected value is at most (probability of the stock going to 0)*$10. so it being worth $1.55 implies a 15.5% chance of going to zero

that's not quite right, since the value of the puts is high-variance, but close enough I think
ok. and that 15.5% is calculated via the differential equations that rylinks mentioned. and this is just the simplified scenario which doesn't consider gamestop dropping to $5, etc.

i think i understand now

thanks again

User avatar
Rylinks
her skirt got quite a lot smaller,
but her heart is still the same
size it was before
Forum Elf
Posts: 12359
Joined: Jun 13, 2018

Re: this thread is for posting matt levine quotes in

Post by Rylinks » Mon Feb 01, 2021 7:31 pm

speaking of option assignment, this was a trade that r/wallstreetbets user 1R0NYMAN did a few years ago:
Add up the transactions:

Bought 500 $15 Calls @ $51.65

Sold 500 $10 Calls @ $56.25

Bought 500 $10 Puts @ $2.88

Sold 500 $15 Puts @ $4.03

Therefore:

($51.65 - $56.25 + $2.88 - $4.03) x 100 x 500 = -$287,500
+$287,500 by executing this trade.

Upon expiration, three things can happen:

UVXY > $15: Puts expire worthless, buys 500 $15 Calls, sells 500 $10 Calls

$750,000 - $500,000 - $287,500 = -$37,500
make $37,500

$15 > UVXY > $10: $15 Calls expire worthless, $10 Puts expire worthless, sells 500 $10 Calls, sells 500 $15 Puts

-$500,000 + $750,000 - $287,000 = -$37,500
make $37,500

UVXY < $10: Calls expire worthless, buys 500 $10 Puts, sells 500 $15 Puts

-$500,000 + $750,000 - $287,500 = -$37,500
make $37,500
it looks great, no matter what you make $37,500! the problem is that the calls can be exercised when they are in the money, and then the index can go down, and then the puts can be exercised when they are in the money, losing hundreds of thousands of dollars. This guy didn't understand this, which is unremarkable. However, Robinhood also didn't understand this (or didn't code their software to stop it), allowing the guy to open a position with hundred of thousands of dollars of risk after depositing only $5,000. Their code even credited his account with the $37,500 as soon as he made the trade, allowing 1R0NYMAN to withdraw $10k before robinhood was able to shut it down and as far as i know he still has the $10,000 today.

So in the end, good trade.

User avatar
Khaos
They should have sent a poet.
Forum Elf
Posts: 16863
Joined: Aug 23, 2018

Re: this thread is for posting matt levine quotes in

Post by Khaos » Mon Feb 01, 2021 7:38 pm

Rylinks wrote:
Khaos wrote: Mon Feb 01, 2021 7:00 pm the more i learn about investments the more i feel like i should have gotten a math degree
https://cs.uwaterloo.ca/~paforsyt/agon.pdf good luck :morph:
agonizing pain has started to kick in on page 7

User avatar
Jeb Bush 2012
Posting Automaton
Posting Automaton
Posts: 2520
Joined: Jun 24, 2020

Re: this thread is for posting matt levine quotes in

Post by Jeb Bush 2012 » Mon Feb 01, 2021 7:41 pm

Rylinks wrote: Mon Feb 01, 2021 7:31 pm speaking of option assignment, this was a trade that r/wallstreetbets user 1R0NYMAN did a few years ago:

it looks great, no matter what you make $37,500! the problem is that the calls can be exercised when they are in the money, and then the index can go down, and then the puts can be exercised when they are in the money, losing hundreds of thousands of dollars. This guy didn't understand this, which is unremarkable. However, Robinhood also didn't understand this (or didn't code their software to stop it), allowing the guy to open a position with hundred of thousands of dollars of risk after depositing only $5,000. Their code even credited his account with the $37,500 as soon as he made the trade, allowing 1R0NYMAN to withdraw $10k before robinhood was able to shut it down and as far as i know he still has the $10,000 today.

So in the end, good trade.
lol

User avatar
Khaos
They should have sent a poet.
Forum Elf
Posts: 16863
Joined: Aug 23, 2018

Re: this thread is for posting matt levine quotes in

Post by Khaos » Mon Feb 01, 2021 7:42 pm

Rylinks wrote:it looks great, no matter what you make $37,500! the problem is that the calls can be exercised when they are in the money, and then the index can go down, and then the puts can be exercised when they are in the money, losing hundreds of thousands of dollars. This guy didn't understand this, which is unremarkable. However, Robinhood also didn't understand this (or didn't code their software to stop it), allowing the guy to open a position with hundred of thousands of dollars of risk after depositing only $5,000. Their code even credited his account with the $37,500 as soon as he made the trade, allowing 1R0NYMAN to withdraw $10k before robinhood was able to shut it down and as far as i know he still has the $10,000 today.

So in the end, good trade.
i think i understand!

User avatar
Khaos
They should have sent a poet.
Forum Elf
Posts: 16863
Joined: Aug 23, 2018

Re: this thread is for posting matt levine quotes in

Post by Khaos » Mon Feb 01, 2021 10:41 pm

Rylinks wrote: Mon Feb 01, 2021 7:01 pm
Khaos wrote: Mon Feb 01, 2021 7:00 pm the more i learn about investments the more i feel like i should have gotten a math degree
https://cs.uwaterloo.ca/~paforsyt/agon.pdf good luck :morph:
In fact, there is a history of Ponzi-like hedge funds which simply write put options with essentially no
hedging. In this case, these funds will perform very well for several years, since markets tend to drift up on
average. However, then a sudden market drop occurs, and they will blow up. Blowing up is a technical term
for losing all your capital and being forced to get a real job.
lol

User avatar
Juri
We're Knights of the Round Table
We attack each turn if able
Typewriter Monkey
Posts: 9999
Joined: Aug 23, 2018

Re: this thread is for posting matt levine quotes in

Post by Juri » Tue Feb 02, 2021 12:09 am

Ashenai wrote: Mon Feb 01, 2021 6:20 pm You can fondle the cube, but it will not respond.
Image
Image

User avatar
Juri
We're Knights of the Round Table
We attack each turn if able
Typewriter Monkey
Posts: 9999
Joined: Aug 23, 2018

Re: this thread is for posting matt levine quotes in

Post by Juri » Tue Feb 02, 2021 12:12 am

Rylinks wrote: Mon Feb 01, 2021 7:31 pm speaking of option assignment, this was a trade that r/wallstreetbets user 1R0NYMAN did a few years ago:
Add up the transactions:

Bought 500 $15 Calls @ $51.65

Sold 500 $10 Calls @ $56.25

Bought 500 $10 Puts @ $2.88

Sold 500 $15 Puts @ $4.03

Therefore:

($51.65 - $56.25 + $2.88 - $4.03) x 100 x 500 = -$287,500
+$287,500 by executing this trade.

Upon expiration, three things can happen:

UVXY > $15: Puts expire worthless, buys 500 $15 Calls, sells 500 $10 Calls

$750,000 - $500,000 - $287,500 = -$37,500
make $37,500

$15 > UVXY > $10: $15 Calls expire worthless, $10 Puts expire worthless, sells 500 $10 Calls, sells 500 $15 Puts

-$500,000 + $750,000 - $287,000 = -$37,500
make $37,500

UVXY < $10: Calls expire worthless, buys 500 $10 Puts, sells 500 $15 Puts

-$500,000 + $750,000 - $287,500 = -$37,500
make $37,500
it looks great, no matter what you make $37,500! the problem is that the calls can be exercised when they are in the money, and then the index can go down, and then the puts can be exercised when they are in the money, losing hundreds of thousands of dollars. This guy didn't understand this, which is unremarkable. However, Robinhood also didn't understand this (or didn't code their software to stop it), allowing the guy to open a position with hundred of thousands of dollars of risk after depositing only $5,000. Their code even credited his account with the $37,500 as soon as he made the trade, allowing 1R0NYMAN to withdraw $10k before robinhood was able to shut it down and as far as i know he still has the $10,000 today.

So in the end, good trade.
lol
Image

User avatar
Rylinks
her skirt got quite a lot smaller,
but her heart is still the same
size it was before
Forum Elf
Posts: 12359
Joined: Jun 13, 2018

Re: this thread is for posting matt levine quotes in

Post by Rylinks » Tue Feb 02, 2021 3:14 am

Rylinks wrote: Mon Feb 01, 2021 7:31 pm
So in the end, good trade.
https://www.reddit.com/r/wallstreetbets ... _1r0nyman/

User avatar
Ashenai
Forum Elf
Forum Elf
Posts: 10522
Joined: May 29, 2019

Re: this thread is for posting matt levine quotes in

Post by Ashenai » Tue Feb 02, 2021 9:57 am

Spoiler!
Image

I just like that investing graph, it's an extremely WSB graph

User avatar
Ashenai
Forum Elf
Forum Elf
Posts: 10522
Joined: May 29, 2019

Re: this thread is for posting matt levine quotes in

Post by Ashenai » Tue Feb 02, 2021 6:44 pm

(To be fair that’s how social media always works: A thing is good, which causes it to become big, which causes it to become bad. Circle of life. “No one goes there anymore, it’s too crowded.”)

User avatar
Jeb Bush 2012
Posting Automaton
Posting Automaton
Posts: 2520
Joined: Jun 24, 2020

Re: this thread is for posting matt levine quotes in

Post by Jeb Bush 2012 » Wed Feb 03, 2021 5:18 pm

If instead of defrauding the Abacus CDO buyers Goldman had murdered them, that would not have been securities fraud with respect to the Abacus CDO buyers (it would have been murder), but it would still have been securities fraud with respect to Goldman’s shareholders (if the stock dropped after Goldman was charged with murder).

Post Reply