April 2019

luckbox life. money. probability.

APRIL 2019 PREMIERE ISSUE

Rock’s Revivalists Greta Van Fleet cover.indd 1

Monopoly Capitalism is Back Cryptocritical The Case for Proactive Investing

TOM TOM SOSNOFF SOSNOFF FIREBRAND OF FINANCE

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contents April 2019

“ Nobody wants to listen to some suit who’s never made a trade try to explain the obvious.”

cover story

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Sosnoff rocks the world of finance

luckbox leans in with Tom Sosnoff, arguably the nation’s leading proponent of active investing.

Topics

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optionality & the case for proactive investing

Investors don’t have to turn pro to become proactive... and their portfolios will thank them for it.

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monopoly capitalism is back

After the latest meltdown, Wolf Richter weighs in on crypto’s capers.

Google, Facebook and Amazon have great technology, but much of their success comes from regulatory and antitrust mistakes.

PHOTOGRAPH: DOYLE LACRUA

Tom Sosnoff on mainstream financial media

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cryptocritical

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Modern_T

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editor-in-chief ed mckinley managing editor yesenia duran technical editor mike rechentin features editor tom preston contributing editors vonetta logan, wolf richter creative director jacqueline cantu

Greta Van Fleet

P. 42

actionable trading ideas LIGHT THIS CANDLE

13 Gearing for a Breakout

THE TECHNICIAN

14 The Diamond Trade MACRO VIEW

16 Don’t Fear a Market’s Uncertainty DO DILIGENCE

18 Value is a Relative Term FUTURES

19 Crude Moves CHERRY PICKS

20 Two Timely Energy Trades CASH ALTS

21 Shorter-Duration CDs

trends life, luxury & the pursuit of happiness R ECORD HIGH

42 Rock’s Rising Revivalists: Greta Van Fleet V ENTURED

46 Finally, a Robot That Can Make Itself Useful ARTS

& MEDIA

48 AlphaBrain, They Shall Not Grow Old & Popular Science

techniques

ditorial director e jeff joseph

essential trading strategies BASIC

56 Interpreting Indices INTERMEDIATE

58 Covered Calls ADVANCED

62 Covered Strangles 64 luckbox of the month

Who gets the

nod? Hint: his nickname rhymes with “luck.”

FINANCIAL FITNESS

50 The Slowest Loser

submit a story idea tips@luckboxmagazine.com comments & critiques feedback@luckboxmagazine.com request contributor’s guidelines, submit press releases & editorial inquiries editor@luckboxmagazine.com advertising inquiries advertise@luckboxmagazine.com subscriptions & service service@luckboxmagazine.com media & business inquiries publisher jeff joseph jj@luckboxmagazine.com luckbox magazine is published at 19 n. sangamon, chicago, IL. 60607. editorial offices: 855.468.2789 www.luckboxmagazine.com

THE

POKER TRADE

52 Know Your Call Options

contributing producers adrienne applegate, jessica mcdermott

luckbox life. money. probability.

APRIL 2019 PREMIERE ISSUE

Monopoly Capitalism is Back Cryptocritical The Case for Proactive Investing

55 Calendar Rock’s Revivalists Greta Van Fleet

TOM TOM SOSNOFF SOSNOFF

On the cover: Illustration by Butcher Billy

luckbox magazine

@luckboxmag

FIREBRAND OF FINANCE

luckbox magazine content is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities and futures can involve high risk and the loss of any funds invested. luckbox magazine, a brand of tastytrade, Inc., does not provide investment or financial advice or make investment recommendations through its content, financial programming or otherwise. The information provided in luckbox magazine may not be appropriate for all individuals, and is provided without respect to any individual’s financial sophistication, financial situation, investing time horizon or risk tolerance. luckbox magazine and tastytrade are not in the business of executing securities or futures transactions, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. luckbox magazine and tastytrade are not licensed financial advisers, registered investment advisers, or registered broker-dealers. Options, futures and futures options are not suitable for all investors. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any securities or futures transaction or trade. For simplicity, the examples and illustrations in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, endorsement, promotion or offer by tastytrade, or any of its subsidiaries, affiliates or assigns. While luckbox magazine and tastytrade believe that the information contained in luckbox magazine is reliable and make efforts to assure its accuracy, the publisher disclaims responsibility for opinions and representation of facts contained herein. Active investing is not easy, so be careful out there!

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PHOTOGRAPHS: (GRETA) TRAVIS SHINN; (ZUCKERBERG) REUTERS/CHARLES PLATIAU

trades

contributing art director cassie scroggins

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think big.

Small. Standard. Simple. That’s how we’ll bring more participants to the futures market. Self-directed investors need more appropriate ways to manage their risk, hedge their positions, and speculate on market movements.

For a limited time, you can subscribe to the Small Exchange to lock in reduced clearing and market data fees for life. No annual or renewal fees, no obligations.

This is a new kind of exchange where you enjoy the best of futures without the institutional baggage that keeps you in the past.

If you want to trade the Smalls, visit www.thesmallexchange.com.

The Small Exchange’s application was submitted to the CFTC in December 2018. The CFTC generally reviews the application for 180 days; however, there are no guarantees that the Small Exchange will be approved by the CFTC within this timeframe or at all. The launch of the exchange is contingent upon approval. Please visit the website for full terms and conditions.

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welcome to luckbox!

T

hanks for picking up this inaugural issue of luckbox!

But don’t go online searching for the meaning of our name. Gamblers and investors alike refer to unskilled winners as luckboxes. Luckboxes don’t know how to wager or trade intelligently, but they come out on top through no fault of their own. Any dolt can become a luckbox occasionally.

But at luckbox magazine we believe you can do better than wait around for good fortune to strike. Work at it, and you can make your own good luck.

At first glance, luckbox looks like a magazine for readers who want more from their lives, their money and their stuff. On one level that’s what luckbox is about. But luckbox offers more than just lifestyle and how-to articles. It’s a tool that can change the way you think about the choices you make.

How? We view the world through the lens of “probability.”

what are the chances?

In just about every decision you make during your day and throughout your life, you use probabilities. Is it going to rain? Is it safe to cross the street? Should I eat this food? It’s a process based mainly on personal experience. But if you’ve stayed safe so far because of those everyday probabilities, why wouldn’t you use them for every other part of your life? Especially your money?

Instead of relying upon “what ifs,” “might happens” or “hope this works,” luckbox quantifies probabilities. We put an actual number on it. And while we can’t calculate the probability of absolutely everything you do (yet), we can quantify the probability of making money on investments. Yes, we’ve figured out how to do that. So, between your experiences and our calculations, you can achieve the best outcomes with your money and your life…without having to count solely upon luck.

If you approach decisions that way – in a probabilistic way – you should achieve more, while reducing risk, learning to spot BS quickly and having a lot more fun. an exclusive club Now, this penchant for probabilities isn’t for everybody. We get that. Some people are happier not knowing the probability of rolling a seven, not knowing the probability of a favorite team winning the championship and not knowing how high the price of gasoline might climb this summer. But that’s OK. It’s an exclusive club of people who 1) find this interesting, 2) find this useful and 3) are willing to spend time figuring it out. luckbox isn’t a mass market publication. Not everyone is willing to invest the time to prepare for opportunity. But when investors take control of their money and make their own decisions, that’s good or everyone. luckbox will show you how.

Tom Preston Features Editor

“Things worthwhile generally don’t just happen.

Luck is the residue of design.”

– Branch Rickey, American baseball executive

“Luck is what happens when preparation meets opportunity.”

– Seneca, Roman philosopher

“You’re so money and you don’t even know it.”

– Trent Walker, Swingers

Jeff Joseph Editorial Director

LIFE. MONEY. PROBABILITY please email your suggestions, criticisms and comments to feedback@luckboxmagazine.com

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luckbox | april 2019

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L U X U R Y P E R F O R M A N C E P A S S I O N

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SHORT INTEREST

“Most observers expect index funds to keep increasing their share of corporate ownership over the next decade.”

According to the late John Bogle, founder of the Vanguard Group, it’s only a matter of time until index mutual funds cross the 50% mark.

If that happens, the “Big Three” might get effective control of 30% or more of the U.S. stock market – an event that would not serve the national interest, in Bogle’s view.

The Big Three that dominate the field with a collective 81% share of index fund assets are Vanguard with a 51% share; BlackRock, 21%; and State Street Global, 9%. Talk about monopoly capitalism.

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“How might we use the tools of antitrust law to check Amazon’s power?”

Stacy Mitchell, co-director of the Institute for Local Self Reliance, recommends splitting Amazon into two pieces by spinning off its e-commerce platform from its retail operation.

That would eliminate Amazon’s ability to control competitors’ access to the market. The government could treat the company like a common carrier, obligating it to offer all sellers access on equal terms, while also policing predatory pricing, the practice of selling goods below cost to drive out competition.

Yep, Monopoly Capitalism is Back! (See page 40.)

“I’d love to teach the Fed how to do the job.”

Jim Cramer, host of CNBC’s Mad Money and a co-founder of The Street, elicited a torrent of responses when he tweeted that message.

Sure, it’s one thing when politicians are under the mistaken impression that the Fed exists to prop up the stock market. But talking heads, too?

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“On 16 occasions over the last 500 years, an emerging power became the equal of an established power.”

Twelve of those events led to shooting wars, says Ray Dalio, Bridgewater founder and co-CIO. War ensued to determine which country would become dominant and which one had to assume a submissive role, the hedge fund billionaire maintains. The current period looks a lot like the 1930s, he continues, with China challenging the U.S. the way Germany and Japan rose to challenge the allies at the beginning of World War II.

“Democratic institutions seem to have been upended by frat-boy billionaires from California.”

Canadian MP Charlie Angus made that accusation when Facebook CEO Mark Zuckerberg failed to show up in London to testify before an international committee that brought together lawmakers from nine countries. Besides railing against Zuckerberg for failing to attend, the lawmakers probed issues ranging from unfair business practices to election tampering.

Is Zuck’s luck running out? Check out luckbox of the month (page 64).

That’s one way to address runaway monopoly capitalism.

april 2019 | luckbox

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FAKE FINANCIAL NEWS

HOW A PRESS RELEASE BECOMES

By Jeff Joseph

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THE WIRE

THE SET-UP On Dec. 19, 2018, the major U.S. equity indices dropped sharply, each closing lower for the third consecutive day as investors remained wary of the Federal Reserve Bank’s widely expected fourth rate hike of the year. During the previous two trading sessions, the Dow lost more than 1,000 points and the S&P 500 made its lowest close in 14 months.

% 63

of Americans believe that the spread of fake news has made it more difficult to make critical financial decisions Source: The American Institute of CPAs (AICPA), 2017

In the aftermath of that downturn, a personalized email arrived in the luckbox inbox at 7:30 a.m.

Eastern Standard Time from a California-based public relations firm. The writer got to the point in the second paragraph. That’s where Gerry Frigon, chief investment officer of Taylor Frigon Capital Management, commented on the return of the “hissy fit.”

Sixteen, bulleted, quotable talking points followed. The first three of which, read…

We have discussed many times over the last decade or so how the market’s reactions to scary headlines and prognostications of gloom can be described as a “hissy fit.”

It’s like the reaction of the spoiled child who is told they can’t have any more candy. Stomp out of the room in a huff and whine and complain for hours as if that is going to make a difference.

Worse yet, and certainly the root cause of “spoiled child syndrome,” the parent gives in and lets the child have what they want only to find the child finds something else to be “pissy” about.

Pure drivel...utterly useless commentary. Good luck with that, Gerry. A PR firm should have little chance of grabbing exposure with this nonsense.

No reputable financial news outlet would seem likely to publish such valueless blather. But what happened next? Watch how noise becomes signal, as this PR becomes a post…

ILLUSTRATIONS: ROBERT HENDRICKS

“Fake news” entered our lexicon in 2017. Often, the tainted term can seem ambiguous – its meaning tortured to fit a particular political perspective.

But fake news doesn’t always concern government. Far too many pieces of fake financial news are bouncing around in the media these days.

Much of the financial fakery resides online.

Digital news platforms struggle daily to attract eyeballs that build traffic and sell advertisements.

Two factors influence digital traffic – the quantity and the quality of content posted on the site.

That’s why many website owners stay on the lookout for more content to post.

To simplify matters, some prefer turnkey content that’s free of charge and ready to publish.

Financial public relations firms understand that hunger for content.

In fact, some now exist mainly to fill that void.

They represent untold numbers of mutual fund managers, investment advisers and financial newsletter writers longing for electronic “ink” that will increase their visibility and thus help them sell more of whatever they are promoting.

What follows is a factual account of a fake financial news “sting.”

luckbox | april 2019

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WHAT IS THIS THYNG?

A POST

Scan this page for additional content!

THE HOOK Enter ValueWalk, the self-described “news site responsible for breaking worldwide news on business, value investing, politics, technology and science.” At 10:27 a.m. EST, the site posted a story titled, ZIRP: The Return of the Hissy Fit, a nearly verbatim regurgitation of Frigon’s cut-rate clickbait. In less than three hours, prattle finds a platform.

THE STING The financial PR firm scored a placement for its client. The firm boasts on its website of having secured hundreds of articles for clients in the Financial Times, WIRED, Tech Crunch, MIT Technology Review, and The Economist. The company also uses the site to tout itself as “a reliable and trusted source among journalists.”

The ValueWalk website, which boasts traffic of five million visitors per month, gets a free story to post to attract more readers.

Taylor Frigon, the mind-numbing, hissy-fit spotter and investment manager of the barely breathing ($12 million in assets) and inexplicitly expensive (1.45% fee) Taylor Frigon Core Growth (TFCGX) mutual fund lives to see another day with hope that imbecilic insights may incent some fund inflows.

Unfortunately, this happens every day. The result is that many Americans are either poorly informed, or, underinformed. According to a 2018 AICPA/Harris Poll, 28% of Americans involved in investment decisions never study investment strategies or search for potential investment opportunities.

At luckbox, the editors are convinced that the proliferation of financial media noise, fake signals, misinformation and investors’ lack of research is what causes 32% of Americans to make poorly conceived, high-risk investments.

THYNG, an augmented reality app, links luckbox magazine articles to additional digital content. Simply scan any page with a THYNG icon to view video footage, photos and other web-based content on your device.

Download the free THYNG app

Select the “Targets” mode, scan any luckbox page that contains the THYNG icon

Watch the page come to life with enhanced content!

april 2019 | luckbox

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Free your mind.

All this from the think tank that brings you free live trading every minute the markets are open!

GET INSIDE OUR HEADS AT info.tastytrade.com/freemind 1904-candle.indd 12

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trades actionable trading ideas

LIGHT THIS CANDLE

FTV: Gearing for breakout

By Doug Busch

F

ortive Corp. (FTV), a July 2016 spin-off from Danaher (DHR), is an industrial growth company that designs, manufactures, and markets engineered products, software and services worldwide for the transportation and franchise distribution sectors.

While similar diversified technology stocks outpaced the S&P 500 by 6% during 2018, Q4 was particularly harsh on FTV. Since then, the stock is up 20% and looks to head higher.

Enter with buy stop above the bullish ascending triangle trigger of 77.50.

The breakout suggests a measured move to 93. Add to through an 88.44 weekly cup/base trigger.

Such a break would achieve all-time highs.

Fortive Corp. (FTV) Source: ChartSmarter

Douglas Busch, CMT, trades U.S. equities using technical analysis with an emphasis on Japanese candlesticks. @chartsmarter

FTV

BUY: Enter at $77.50 Stop: $74

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trades

THE TECHNICIAN

Deciding whether to “jump the gun”

The Diamond Trade

By Tim Knight

T

o technical traders, diamonds are reversal patterns for both bullish and bearish trading opportunities, and the ability to identify one in the midst of a standard price chart takes a bit of an “eye.” It’s a skill that requires knowledge and experience.

A diamond pattern is formed on the left side by a series of higher highs and lower lows and, once past the midpoint, a series of lower highs and higher lows. The security loses its ability to trend (becoming increasingly wide in its range) and then begins tightening its range again, suggesting that it’s losing its moorings.

A couple of examples of wellformed diamond patterns show how their measured moves played out.

First up comes the S&P 500 cash index from late 2010 and early 2011.

The stock market was in a general uptrend, peaking on the S&P 500 at around 1350. Then it started to subtly trend lower. The diamond pattern during the period of nearly a year has been drawn on top of the price chart for clarity. The range from the top to the bottom of the diamond has been drawn with a shaded rectangle.

Measuring the price movement potential of a diamond requires calculating the spread between its highest and lowest points and then adding that value to the price point where it breaks outside the diamond.

Thus, if a diamond spans from $60 to $70 and breaks down at $65, then a trader can target $55 for the price

A real diamond In this example from the S&P 500, the diamond pattern during a period of nearly a year is drawn on top of the price chart for the sake of clarity. The range from the top to the bottom of the diamond pattern has been drawn with a simple shaded rectangle.

1350

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movement downward. In this example, the peak occurs at about 1370, and the bottom of the diamond comes at about 1230, which means the spread is 140 points.

The price broke beneath the diamond on Aug. 1, 2011, when the Index was at about 1290. Subtracting 140 from 1290 yields the price target of 1150, which was swiftly achieved by Aug. 9. The index went as low as 1074 in early October before it resumed its climb. The market dropped so quickly because of a U.S. Treasury debt crisis. The diamond not only highlighted an excellent trading opportunity but did so with remarkable swiftness.

Another example is equally useful.

The chart “Long time in the making” (below) shows the semiconductor index, referenced on most charting platforms with the symbol $SOX. This diamond spans about a year, from September 2017 to October 2018. The spread is illustrated with

SOX Long time in the making This diamond spans a period of about a year, from September 2017 to October 2018. The spread is illustrated with a solid rectangle, and the same-sized rectangle is shown from the “failure” point.

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1100 1050 Dec ‘10

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Oct ‘11

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Time will tell As of this writing, the example was nowhere near fulfilling its price target.

Only time will tell if it ultimately does.

XLP TARGET Assuming this diamond pattern plays out, the price target tinted below is the eventual target.

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a solid rectangle, and the same-sized rectangle is shown from the “failure” point. Based on that calculation, a target price of a little under 1100 was offered, and the target was achieved by December 2018.

It wasn’t as quick as the S&P 500 movement from 2011, but it provided an excellent opportunity nonetheless.

For diamond tops, volume usually increases during the formation of the pattern, largely because the “churn” increases as bulls and bears struggle over the direction of the stock. One benefit of a diamond, as opposed to a head-and-shoulders pattern (of either variety), is that the signal tends to come earlier. That’s because of simple geometry: a price will break below an ascending line (or above a descending line, as the case may be) much sooner than a horizontal line, so the amount of move that one can “capture” is that much larger.

To be clear, diamond patterns are not strictly for shorting opportunities; instead, they are reversal patterns, which means they can be just as potent at spotting bottoms as they are at spotting tops. Given the market’s nearly decade-long ascent, however, these examples are focused on topping patterns. But the rules of measuring the targets are nearly identical. The only difference is that instead of calculating from the “breakdown” point (when the price

Apr ‘18

Jul ‘19

Jan ‘19

breaks below the lower-right line segment of the diamond), it is instead calculated from the “breakout” point (in which the price breaks above the upper-right line segment).

As of this writing, the final example was nowhere near fulfilling its price target. Only time will tell if it ultimately does. The opportunity in question is the Consumer Staples Select Sect. SPDR ETF (XLP).

Here’s an examination of the pattern piece by piece.

1. It begins in February 2017.

2. Then the price ascends until January 2018 at a value of about $59.

3. T he price descends until May 2018 at a value of about $49 (thus a spread of $10).

4. A price failure took place on Dec. 18, 2018 at about $53.

5. The price target, therefore, is $43 — a descent of 20% from the failure.

Traders can use these patterns to make the tactical decision on whether to “jump the gun.” In the XLP graph above, part of the pattern is circled where the profit opportunity is greater, but likewise so is the risk. In other words, if a trader anticipates that the pattern will, in fact, complete itself, it makes more sense to short XLP at the area circled (about $57) instead of waiting until the “official” price failure $4 beneath.

The risk is that the pattern will never complete. A trader might

XLP 1904-technician.indd 15

Oct ‘18

2008

2010

2012

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short it at $57 and watch the price go zipping higher, thus ruining the pattern. A 90% complete pattern is not, after all, a complete pattern but merely one in formation. Deciding whether or not to take advantage of a trading opportunity on either the long or the short side before the pattern itself is complete, regardless of the pattern type, is a choice only an individual trader can make. Strictly speaking, traders should wait until the pattern is finished.

With this example, the pattern has, in fact, completed, so the price target is illustrated in the chart below.

Assuming this diamond pattern plays out, this was another successful estimate of a target price based on a simple calculation.

The key to diamonds is being able to spot them. Traders who believe a diamond is forming can carefully circumscribe the price bars with either a quartet of trendlines or, better yet, a polygon tool.

Don’t “cheat” by allowing price bars to pierce the pattern. Instead, the entirety of the price action should be contained within the pattern as it’s drawn. If not, take a pass on it and wait for a cleaner opportunity.

2016

2018

A benefit of a diamond pattern is that the signal tends to come earlier

Tim Knight has been using technical analysis to trade the markets for 30 years.

He founded Prophet Financial Systems and offers free access to his charting platform at slopecharts.com.

april 2019 | luckbox

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trades

MACRO VIEW

Don’t Fear a Market’s Uncertainty; Manage It

By Amelia Bourdeau

“The most important thing is never certainty. Certainty comes when it is ready. The most important thing is having a clear and healthy framework for dealing with uncertainty, which is what most of life turns out to be.”

Slowdown signals The European growth slowdown will weigh on the Euro.

– Ethan Nichtern, Buddhist teacher

G

lobal macro investors sift through voluminous information from a wide range of economic, geopolitical and market sources to form their trade ideas. That’s why they should consider developing a framework for examining markets. Applying that framework consistently as market conditions change can help them deal with uncertainty.

After all, uncertainty can mean opportunity. In fact, macro traders tend to look for events that could dislocate markets, and they try to find assets that they view as mispriced.

So, volatile market conditions can provide an opportunity for macro trading to shine. And the themes that emerge can become important building blocks of a macro framework for examining the markets.

Ferreting out market themes can seem like crossing a river by feeling the stones underfoot. But tracking how the themes develop provides a compass that macro traders can use to initiate or manage positions.

Themes influencing the market for 2019 include mid to late U.S. economic cycle market dynamics, the China growth slowdown, the fate of

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Source: Bloomberg

BREXIT, and the European Union’s growth slowdown and its May parliamentary elections.

In times of noisy and volatile markets, tracking market themes keeps traders open-minded, even when other traders become discouraged and wary of taking risks.

Market themes act as a guide for broad event risk. Some are associated with key dates or timeframes. Macro themes tend to simmer in the background, but they can trigger volatil-

ity when they come to the forefront.

That’s why market themes have the potential to cause big, directional moves. Those are opportunities to pursue alpha. There’s a saying in macro trading – “never waste a crisis.” Staying on top of market positioning, expectations and commentary on a market theme provides information on how the market is positioned. Be nimble enough to have a trading plan for a base case scenario and a back-up scenario.

Short EUR/USD through an option trade — Buy a 1.1200, six-month EUR/USD put

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the binary response If the market theme triggers an event that has a binary outcome, use a trading plan that opposes the market consensus in the event of a surprise result. Remember when traders were long the British pound/U.S. dollar (GBP/USD) currency pair heading into the June 23, 2016, UK BREXIT referendum? Even though the polling was too close to call, traders thought voters would not vote to leave the European Union. The vote in favor of leaving shocked traders, and GBP/USD currency pair plummeted and global equity indices fell heavily (see “Slowdown signals,” page 16). Hindsight is 20/20, but it would have been beneficial to have had an anti-consensus short GBP/ USD trade of even a small size for that binary event.

While broad event risk provides conditions to make or break a trading year, narrow event risk provides opportunities for tactical shorter-term trading – even intra-day.

Look at the market data and events calendar for the month and then one week out. Considering the broad themes and current market conditions, which near-term data release or event will the market give more weight? Will any of the near-term data give key information about one of the broad market themes? Are market positions skewed heavily one way or the other relative to the data or events? Those data/events are most likely to produce a market reaction.

Examples of narrow event risk include G10 central bank policy announcements and speeches, the U.S. employment report and corporate earnings releases. Late last year, the Fed emphasized it will be “data dependent” with regard to monetary policy. That gives each U.S. Tier 1 economic data release more potential to cause volatility – influencing interest rates and fed funds rate expectations, which in turn affect U.S. equity indices on the day. Intraday U.S. equity index moves, can drive G10 currency moves, strengthening high beta currencies (the Aussie, the New Zealand dollar and the Canadian dollar) if U.S. equity indices rise or strengthening safe

AUD/USD VS. USD/CNY Slower growth in China weighs on Australia’s economy and on the Aussie. Look for AUD/USD to move lower.

Source: Bloomberg

haven currencies (the U.S. dollar, the Japanese yen and the Swiss Franc) if U.S. equity indices fall. trading these themes Here are some ways to trade the market themes mentioned . Short the Australian dollar/U.S. dollar (AUD/ USD) currency pair on the China Growth slowdown. Slower China growth hurts Australia’s economy from trade, investment and commodity price standpoints. In addition, domestically, Australia has a housing sector slump – falling house prices combined with tighter financial conditions are damaging that sector. China’s growth slowdown will weigh further on AUD/USD. Short AUD/USD in the 0.72 to 0.74 range. Target is 0.60 – the 2008 low.

Even though the U.S. economy is growing less rapidly, the rest of the world looks worse by comparison. Global economic slowdown combined with political uncertainty in both Europe and the UK should keep the U.S. dollar bid, especially as

it is a safe-haven currency.

In Europe, growth is slowing, the May EU Parliamentary elections carry political risk and there’s uncertainty about whether Italy can meet its fiscal targets. The European Central Bank (ECB) ended quantitative easing in December 2018. It appears unlikely that the ECB will be able to raise its policy rate anytime soon. An alternative way to trade this opportunity is to short the EUR/USD through an option, such as buying a 1.1200, six-month EUR/USD put.

A lower-cost alternative is a put spread. The strategy involves buying a 1.12 put while financing, by selling, the 1.115 put. While the payoff is not as great as simply buying the 1.12 put, it can be done for considerably less money. Both trades can be done using the Euro/U.S. dollar futures.

Market themes have the potential to cause big, directional moves

Amelia Bourdeau is CEO at marketcompassllc.com, a macroeconomic research firm which advises individual investors, hedge funds, and institutional funds on foreign exchange, macroeconomic trading, and event risk. @ameliabourdeau

april 2019 | luckbox

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trades

DO DILIGENCE

Emerging financial technology helps proactive investors understand their portfolios

Value is a Relative Term

By James Blakeway

T

he John Hancock Disciplined Value mutual fund (JDVNX) has seen some good years. The Fund’s portfolio managers have managed the fund using a hybrid quantitative and fundamental stock-picking approach since 2000. Morningstar assigns the fund an “average” return rating and an “above average” risk rating. They award the fund a threestar (neutral) rating out of a possible five stars, but that hasn’t prevented the fund from accumulating more than $14.5 billion in assets from investors willing to delegate their assets to a “pro.”

And why not? Despite the lukewarm rating and the cautionary note that “fees could be more competitive,” Morningstar still declares the fund a “strong option.”

Most individual investors – particularly those invested in mutual funds – have not paid to access Morningstar’s research database. But as financial technology develops, proactive investors have more options to take a comprehensive look under the hood at their own investment portfolios.

One such tool is Quiet Foundation (QF), which provides users a comprehensive portfolio analysis at no cost. The platform employs Exploratory Portfolio Intelligence, a blend of proprietary research, technology and machine learning, to produce six-point analysis rooted in data science. The free service analyzes the user’s portfolio diversification, liquidity and the probability of gains or losses within one year.

The goal is to ensure investors don’t have many surprises. They can simply input stock and mutual fund positions and receive an on-demand customized report detailing the portfolio’s level of risk and potential for reward.

So how does this “disciplined value” approach fare? The JDVNX fund, according to its literature, “seeks capital growth from its

equity holdings.”

Running JDVNX through the QF analysis, the portfolio scores a “below average” 35 (out of 100). What contributied to this result?

This under-the-hood analysis reveals certain vulnerabilities.

To begin with, it strongly correlates (1.03 Beta) with the overall market. There are alternatives to a fund with a lofty expense ratio of 0.69%, including funds that track the S&P 500 Index that may have much lower fees. Nearly half of the 30,000 mutual funds correlate with Top 10 Holdings (as of 12/31/18) Berkshire Hathaway Inc., Class B

4.6%

Johnson & Johnson

4.5%

Cisco Systems, Inc.

3.5%

JPMorgan Chase & Co.

3.4%

Pfizer, Inc.

3.3%

Comcast Corp., Class A

3.1%

Bank of America Corp.

2.9%

Procter & Gamble Co.

2.8%

Chevron Corp.

2.7%

Wells Fargo & Company

2.6%

the S&P 500 – which makes a case that nearly half of all funds provide little or no variation despite having an “industry veteran” at the helm.

Examining JDVNX further, the portfolio-to-benchmark underperforms the market.

Not only has it produced lower returns over the past year, but it also has had considerably higher volatility of returns. Specifically, yearover-year, JDVNX has lost -7.5% compared with a -2.3% decline in the S&P 500. The S&P 500 had 19% volatility while JDVNX was sharply higher at 31%. Those factors helped lower the fund’s score.

Another metric from the QF output is a forward-looking metric focused on large moves in the portfolio, compared to the market. The portfolio components are run through thousands of simulations based on projections of where the individual components are expected to fall over the following year. The goal is to see the likelihood of a gain or loss greater than 10%, compared to the S&P 500. JDVNX actually had higher probabilities of movement compared to the S&P 500, which means it’s less likely to be stable.

The QF rating of the JDVNX portfolio, in the context of the neutral rating received from Morningstar, provides another reminder that proactive investors willing to engage in active trading should consider relying upon more than the advice of a broker, or any one research resource – especially as more sophisticated portfolio analysis platforms become available at little or no cost.

James Blakeway is CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides free investment advisory services for self-directed investors.

Look under your own hood with QF

Past performance is no guarantee of future results. Information provided in an EPI Report does not consider the specific profile, objectives or circumstances of any particular investor or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her investment professional. Investment suitability must be independently determined for each individual investor. QF does not make suitability determinations or investment recommendations for investors. EPI utilizes the S&P 500 as its benchmark given that the S&P 500 is considered a barometer of stock performance in the United States. Aspects of the analysis and information found in an EPI Report is based upon simulated and/or hypothetical performance. Simulated and hypothetical performance have inherent limitations and do not represent the actual performance results of any particular investment products. The EPI Report does not guarantee any results or outcomes in the financial markets. Investors should be aware of the methodology used to produce an EPI Report and the inherent limitations when placing reliance on the results. For additional information about EPI Reports, visit the QF website: quietfoundation.com. Morningstar reports can be found at Morningstar.com

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FUTURES

A veteran futures trader sees opportunity in recent volatility

Crude Moves

By Pete Mulmat

I

nvestors around the world trade an average of a million light sweet crude oil (WTI) futures and options contracts every day.

With that mind-altering volume changing hands, WTI futures and options present traders with plenty of attractive asset speculation and hedging opportunities. This high implied volatility (IV) market has historically worked to the advantage of short options traders.

Crude oil is the unprocessed product that’s been withdrawn from the ground. It’s the fossil fuel that’s refined to give consumers their daily rations of gasoline, heating oil, jet fuel and plastics.

Crude oil futures represent the consummate commodity because it’s the most-traded commodity market today. On average WTI crude futures trade two billion barrels per day, the equivalent of almost 30 times the amount of oil used around the world each day.

Crude oil has had an extraordinary amount of movement over the last 12 months. Making a high of $75.40 a barrel in November of last year, the market plummeted to $42.80 before seeing a solid $13 bounce off the lows.

For a pure directional play, traders looking to see a revision of the downtrend after a “healthy” 22% bounce can use a short future, adding a covered put to enhance cost basis and decrease the short delta of the overall position.

The same strategy holds if the upside move resumes and reaches back into the $60 to $65 range into 2019. Keep in mind that with covered puts and covered calls traders can add the call or put against an existing futures position at no additional buying power reduction, or BPR, as long as the expiration month of the option aligns with the future. (BPR refers to using buying power efficiently to maximize the number of occurrences and return on capital.)

While implied volatility has recently decreased from +60%, it currently sits at its five-year historical mean of 35%. With an average correlation of -0.35, crude oil IV is much more two-sided than stock’s IV, which has a correlation of -0.7 relative to price. That’s to say

that crude oil experiences spikes in volatility in both directions, so we may not have to wait for new lows in /CL for more expensive options.

If IV climbs back into the 50s, iron condors become attractive for investors looking for defined risk, delta-neutral trades. (Iron condors are defined as non-directional options trading strategy.)

Strangles also come into play for those looking for undefined risk. Skewing strangles as the market moves to $60, or to the downside, adds a price reversion aspect to the trade with an attractive theta component.

Pete Mulmat, chief futures strategist, hosts daily futures trading segments on the tastytrade network.

Iron condors become attractive for defined risk, delta-neutral trades

WTI Crude’s Moves The commodity has recently seen a 50% trading range

Average Realized Volatility: Crude Oil - 30% S&P 500 - 16% Treasury Bonds - 7%

This high-implied volatility market has historically worked to the advantage of the short options trader.

Backtesting 45-day options from 2010 to present

Short 1 standard deviation Strangle in /CL

Success Rate

82%

Average P/L

0.40 ($400)

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trades

CHERRY PICKS

Sector volatility projections

Two Timely Energy Trades

By Michael Rechenthin

E

TFs have become popular among investors, partly because of their low cost and because they enable investors to participate in a large number of stocks in a single transaction. The ETF with the largest daily volumes traded is the S&P 500 ETF (SPY). An average of 110 million shares are traded per day, which amounts to more than $28 billion a day – a serious amount of liquidity.

Below, we’ve listed a few favorite sector ETFs, along with the expected volatility of each. To help keep things relevant, we’ve made comparisons to the S&P 500.

Expected volatility – formally known as implied volatility – is calculated from option prices and represents the amount of movement that can reasonably be expected. In other words, the higher an ETF’s option price, the greater the expectation of movement.

The lower the price of an option, the less it is expected to move. The farthest righthand column compares the expected volatility of the S&P 500 to various sector ETFs. This is accomplished by dividing the expected volatility of the ETF by the expected volatility of the S&P 500.

The result shows how much greater or less the expected volatility is for ETFs relative to the broader market.

How can investors use this information?

First, they should become familiar with ETFs they own and how much they might move.

Investors with exposure in the oil and natural gas sector shouldn’t be surprised if those stocks move 50% more than the S&P 500 during the next year. So, if the S&P 500 moves by 10%, XOP might move 15%. Second, they can take advantage of high volatility. Covered calls and short puts are two strategies that can rein in that excess To sign up for volatility.

Michael Rechenthin, Ph.D., (“Dr. Data”) is head of research and data science at tastytrade.

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free cherry picks and daily market insights, visit tastytrade.

Sector ETFs Expected volatility is calculated from option prices and represents the amount of movement that can reasonably be expected.

Symbol

Description

Expected Volatility (%)

Compared to our baseline S&P 500, how much “volatility” are we expecting over the next year?

XOP

Oil and Gas

32

78% greater expected volatility

XHB

Homebuilders

22

22% greater expected volatility

XLE

Energy

21

17% greater expected volatility

XLK

Technology

21

17% greater expected volatility

XLB

Materials

21

17% greater expected volatility

XLY

Consumer Discretionary

20

11% greater expected volatility

XLF

Financials

20

11% greater expected volatility

XLI

Industrials

19

6% greater expected volatility

SPY

S&P 500

18

-

IYR

Real Estate

18

Same expected volatility

XLV

Healthcare

17

6% less expected volatility

XLU

Utilities

15

17% less expected volatility

XLP

Consumer Staples

15

17% less expected volatility

BULLISH OIL AND GAS?

BULLISH ENERGY?

Consider selling a put using the first out-of-the-money strike with the next monthly expiration. That strategy theoretically carries less risk than owning the stock, and it can lower your overall breakeven.

Buy 100 shares of the ETF and sell the first out-of-the-money call strike using the next monthly expiration.

That strategy has the advantage of owning the stock and collecting the dividend, which is currently yielding 3%. Depending on the amount received by selling the call, that may lower an investor’s overall stock position by $150 or $200.

XOP XLE

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CASH ALTS

Shorter-Duration CDs Offer Higher-Yield Opportunity

By Michael Rechenthin

W

ith the Federal Reserve increasing the overnight interest rate, shorter-duration treasuries have increased in yield.

That “flattening of the yield curve” means three-month CDs now have yields comparable to considerably longer CDs. That’s unusual – generally, longer-term CDs have considerably higher yields than shorter-duration CDs. For example, the annualized yield on a three-month Treasury is currently 2.5% while a 10-year is 2.7%. Historically, that spread (the difference between the long- and short-terms) is larger. The present situation tilts the favor to the purchaser of shorter-term CDs (see “Watch the spread,” below).

Look at the end of 2016, when a three-month Treasury yielded 0.5%. To get 2.5%, investors would have to lock money away for 10 years or more. Now they can earn an annualized return of 2.5% and lock money up for only three months. That’s a big advantage for anyone looking to park money for only a short time. covered call in utilities When using covered calls in utilities you get the advantage of reduced theoretical volatility from

the overall market, and you receive additional cash flow potential.

Utility stocks account for less than 5% of the S&P 500. That means many investors are underexposed to that relatively stable sector of the economy and might gain from the added diversification of utilities.

XLU, one of the most liquid ETFs, includes 27 stocks and currently has a dividend yield of approximately 3.2%. Compare that to the S&P 500’s dividend of 1.9%. An additional advantage is that drawdowns are typically less severe than with many of the equity indices.

From September to December 2018, when the S&P 500 lost nearly 20% of its value, utilities were in the green during much of that time.

(See “Get down,” right.)

One choice is simply buying the ETF and receiving the dividends as cash payments.

The other choice is to buy 100 shares and sell out-of-the-money covered calls using the monthly expiration.

The second approach has the potential to increase cash flow, reduce the largest drawdown and increase the overall stability of the stock by decreasing the cost-basis of the position.

Investors might gain from the added diversification of utilities Get down XLU, one the most liquid ETFs, currently has a dividend yield of approximately 3.2%. Compare that to the S&P 500’s dividend of 1.9%.

Watch the spread At the end of 2016, the three-month Treasury yielded 0.5%. So to secure 2.5%, investors would have to lock money away for 10 years or more.

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ROCK STARS

Tom Sosnoff, arguably the nation’s leading proponent of active investing, combines showmanship and technology to help traders take control of their portfolios. From beginner to expert, active investors cherish Sosnoff as a friend and mentor.

This is his story.

luckbox leans in with

Tom Sosnoff Photography by Robert Hendricks

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By 1999, Tom Sosnoff had been successfully trading OEX options at the Chicago Board Options Exchange for nearly 20 years. That’s something rare. Most traders fail within a year.

At the time, a few professional quoting and trading platforms – like Bloomberg and Schwartzatron – had become available. But the world was changing. The Internet was spreading, and broker-dealers were beginning to launch their own online trading platforms for retail clients. Sosnoff looked at the possibilities of trading online, off the floor, and saw nothing but hardto-use interfaces that offered no option trading beside covered calls. Thus, he saw an opportunity.

In 2000, Sosnoff put together the team that started thinkorswim, and the members of that group are still together today at tastytrade, their current financial media company. They were traders and technologists who built what they thought would be the best trading platform ever – not just an improvement on existing platforms. It focused on advanced option strategies and sophisticated analysis but was still intuitive and easy to use.

Beyond the technology, thinkorswim succeeded through customer service. Sosnoff, answered customer email messages personally and not just during business hours (which, at thinkorswim, started at 5:30 a.m. and ended at 7:00 p.m., on good days), but also at night and on weekends, too.

In the process, thinkorswim revolutionized the retail trading world. It was a leap ahead in trading technology. Other brokers were left playing catch up, and most never did. In 2009, after TD Ameritrade acquired thinkorswim, Sosnoff recognized that trading technology had become largely commoditized and that growing the customer base and converting people to a smarter way of trading required more.

Since its inception, thinkorswim has had a content component. But in 2011, Sosnoff decided to revolutionize content, and that’s how tastytrade was born. With eight hours of live streaming market content every day, tastytrade is unlike any other financial medium. Like thinkorswim before it, tastytrade is often copied, but never duplicated. When financial journalists talk about probability or volatility, they are generally basing their statements on content from tastytrade.

To support tastytrade viewers who wanted to trade on the strategies outlined on the shows, Sosnoff launched another brokerage firm, tastyworks. tastyworks’ CEO is Scott Sheridan, Sosnoff’s long-time partner since his days of trading OEX options.

Through it all, three elements have remained constant in Sosnoff’s endeavors. He has focused on customer service, built confidence that his team would succeed and maintained his belief that hard work pays off in both trading and entrepreneurship. —Tom Preston

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Live streaming originates in tastytrade studios in Chicago’s West Loop.

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N

Sosnoff Rocks the World of Finance

By Vonetta Logan

ot you again...I’m sick of seeing you,” complains Tom Sosnoff as he contorts himself into an exaggerated slouch and sighs like a teenager whose Wi-Fi has just been turned off. I sidle up to the long communal wooden lunch table that he calls his office. It’s the epicenter of activity in a converted industrial loft in Chicago’s West Loop that serves as headquarters for tastytrade, a rapidly growing online financial network.

I’ve arrived at the table to gather notes for a profile of Sosnoff, tastytrade’s co-CEO. He’s clearly not happy about it, but his protests don’t deter me. I’ve worked with him for years, and his reluctance to sit still for an interview illustrates some of his finer traits – impatience, irreverence and contrariness. He’s happiest when he’s trading, or talking about trading or explaining how to trade.

But an assignment is an assignment, and I have been challenged to capture – I check my assignment notes – “the essence of his brilliance, wisdom, knowledge, perseverance, decisiveness, independence and fearlessness.” As Sosnoff likes to say,”Oy.” It’s those qualities, both the stellar and the contrary, that intertwine to form the character of a man whose vision has changed the game of finance. Sosnoff empowers all sizes and types of investors to make their own decisions, “trade small and trade often,” and seize control of their portfolios. He does it by “showing – not telling” in streaming online shows, live on-air trades and multiple public appearances.

Think of Sosnoff as a true financial savant. He can explain intricate Black-Scholes pricing models with alacrity and then point to a pan of food at lunch and admit that he’s perplexed by the complexity of fajitas. He lives for the markets. For him, torture isn’t a rendition site run by a black-ops CIA operative.

It’s a stock market holiday from trading. He’s at his happiest when the markets re-open after a threeday weekend. “Looks like we’re going to have some nice whackage here,”

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he’ll mutter as he cracks his knuckles before his fingers dance over the keys, sending a flurry of orders that would make anyone else’s head spin and bank account crash.

reluctant rock star

‘We’re all traders, with Sosnoff leading the trading pack.’

Even with all of that material to cover, I’m in a writerly bind.

Sosnoff’s adamant that I avoid writing a “rock star” profile because it’s the last way he would describe himself. “Good menu orderer” would be his preferred designation. On the other hand, Kristi Ross, tastytrade’s co-CEO, is urging me to explain just – Kristi Ross how transformative and legendary Sosnoff has been to the financial industry. “Sosnoff is a true serial entrepreneur and visionary,” says Ross. “He’s leveled the playing field for the self-directed investor, not just once but multiple times, through innovative trading technology, unencumbered accessibility and now through empowering content – all while making it fun for the end user.

How many people can say they’ve made finance fun? To most it seems like an oxymoron.”

Ross persists. “I’ve witnessed the impact he’s had on the everyday investors,” she says. “Customer emails to Tom that have said, ‘You’ve changed my life. I finally understand this stuff.’ ” She’s almost rabid in her zealotry, extolling Sosnoff’s virtues even though as co-CEO she wants to kill him most of the time.

But she’s right, so that’s my opening for an interview. I press Sosnoff on his aversion to the rock star moniker. I’m not prone to obsequiousness and ingratiation, but I’ve seen him on stage brimming with charisma, winning the adulation of legions of fans. He’ll shuffle onto stage, his graying locks flowing past his shoulders from beneath his trademark beret. The audience responds with rapturous applause. But the adulation doesn’t go to Sosnoff’s head. “It makes me uncomfortable” he says of the rock star sobriquet. “I’m embarrassed by it, and it doesn’t mean anything to me.”

So how would Sosnoff describe himself? “I think I may have finally figured out how to define myself,” he says. “I’m a trader geek! That’s why

tastytrade on-air talent includes (from left) co-CEOs Kristi Ross and Tom Sosnoff, and tastytrade co-star Tony Battista.

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I’m pretty indifferent to product or strategy.”

That’s why Sosnoff advises “standing out from the herd.” He’s certainly too complex to fit preconceived categories. He wields an encyclopedic knowledge of the markets, and the breadth of his trading prowess seems nearly unparalleled.

daily dollops of advice

Remarkably, he’s willing to share every bit of his knowledge for free, and one avenue for sharing that endless knowledge is the tastytrade network’s daily original live programming. Sosnoff spends three and a half hours a day, five days a week on camera, making trades, providing analysis or as he calls it, “tape reading” and sharing groundbreaking research. His trading marathons with tastytrade co-host and former floor trader Tony Battista are conducted on their show “tastytrade live,” which airs from 7 a.m. to 10 a.m. Central. That’s when they cover the market open. Their other show, “Last Call,” airs from 2:30 p.m. to 3 p.m. Central and covers the market close. All told, tastytrade generates 40 hours of weekly finance-oriented programming.

“Our viewers love the rawness, the honesty and the brutality of our live shows,” Sosnoff says. “In the world of finance, there isn’t much like it.”

The originality starts with Sosnoff’s personality and appearance. He’s a born performer, effusive and loquacious. He’s usually clad in ripped jeans, motorcycle boots and that signature beret. He doesn’t fit the old-time stereotypes of financial professionals in wingtips, starched shirts and pin-striped suits.

On camera, Sosnoff delivers his live-streamed message without artifice or pretense, enthralling a fanatical following of traders who admire him immensely. He also fills conference halls and music venues, where he delights rapt audiences.

At tastytrade’s “He Said She Said” roadshow earlier this year, many audience members had traveled great distances to see him. Interviews with audience members

revealed how the show changed the way they trade and make decisions.

Time and again they gave nearly the same response: “The show makes me a better trader and a better person.” After the show he waded into the crowd, shaking hands and posing with devotees for selfies. A 10-year-old girl at a show in Dallas spoke of the life-sized poster of Sosnoff that graces her bedroom and declared that she wants to be a trader when she grows up. Those interactions just aren’t typical in the staid world of finance.

But Sosnoff inspires that desire for personal contact because his street cred is legit. His ability to assess risk, make quick decisions and cast aside fear of failure have made him a true serial entrepreneur.

And he’s accomplished that without the turmoil, fear and anguish that plague so many in finance. Instead, he calmly accepts his contrarian nature. To him, traditional finance preaches that traders are either “too dumb” or “too scared” to manage their own money.

In fact, that’s why tastytrade was created. The company provides the financial world with two missing elements: empowerment and entertainment. Sosnoff wants to make finance great again for investors who can’t stand to watch CNBC unless they’ve turned off the sound.

“Nobody wants to listen to some suit who’s never made a trade try to explain the obvious,” he once said in a video rant.

Instead, Sosnoff wanted to create programming that entertained while providing information viewers could use to help manage their portfolios. With a full slate of on-air personalities, the programming makes the markets approachable by providing a logical, mechanical way of investing. It’s done without scripts or teleprompter. He won’t wear makeup even though the show’s in high definition.

Viewers get real, unfiltered actionable information.

Sosnoff strives to carve a niche for tastytrade’s programming by focusing on trading. “We’re going to

do our thing, and we’re really good about sticking in our own trough,” he asserts. “We don’t go outside our area of expertise.”

Accessibility keeps tastytrade’s commentary real, in Sosnoff’s view.

Think of it as what traders need to know, delivered in a way that’s unvarnished and unfiltered. “This is the same conversation we have just sitting here – just a bunch of traders bullshitting,” he says of the show.

The interactions among tastytrade personalities doesn’t just look real.

They are real. Everyone at tastytrade lives the life of an active trader, notes Ross, tastytrade’s co-CEO. “We are customers of our own product,” she says. “We’ve built a culture of empowerment, creating opportunities for employees to learn how to fit investing into their everyday life, which ultimately is the same thing our customers seek to do.”

What delights Sosnoff most is the ripple effect that trading has on people’s lives. “We have found a way to [give] retail investors a vehicle for making decisions, so they can learn,” he observes. “I don’t think we can teach a trader mindset, but we can teach people to make a lot more decisions than they make normally, which will lead to a lot more creative businesses.”

a star is born

But how did that philosophy evolve? It’s the product of a life that doesn’t resemble the misadventures of “Behind the Music.” Notes from conversations with Sosnoff say things like, “Tom’s success was due to his aptitude for trading and decision making, which helped him pivot from trader to trading entrepreneur.” Bo-ring. No trashed hotel rooms? Nothing about biting the head off of a live bat?

Oh right, rock star of finance.

Here’s how Tom Sosnoff became “The Sos.” After graduating from SUNY Albany, he worked for Drexel Burnham Lambert in New York City. In 1981, he decided to move to Chicago, the veritable Wild West for young gunslingers who wanted to make markets or start a business.

The city’s no-holds-barred mentality suited Sosnoff just fine. He arrived in the Midwest backed by a buddy with a $50,000 trading account but with a meager $2,000 in his pocket. His physical location in Chicago would allow him to make trades for his friend back East.

“It was the most money I had ever seen,” he recalls of the funds he had for trading. But working as a proxy to a trader isn’t the same as trading for yourself. The funding pipeline went dry, leaving Sosnoff a new kid in a new town with no job and not much money. What was he to do?

“I networked here among a bunch of clerks, and I got a job option spreading for a month,” Sosnoff says of his recovery from those initial setbacks. His gift for rhetorical acrobatics helped him find a benefactor.

“I met this guy, and his brotherin-law gave me a hundred grand to trade with,” Sosnoff recalls. “I never even met the guy. It was a 70-30 split and then went to 80-20, then 90-10.”

Simply put, Sosnoff was trading so adroitly that he got to keep 90% of the profits on the trades he made for his benefactor.

What were the odds of achieving that level of success? “Only about one out of 10 or one out of 20 traders made it,” Sosnoff says of those days.

But by that point, he was trading thousands of contracts a day.

Soon, Sosnoff decided to square up with his backer and buy himself out.

“I made four hundred grand and I gave him his original hundred grand back and then another hundred. He doubled his money and I had my own money to trade with.” Thus, he sowed the seeds that would grow into his core belief in investor empowerment.

first millions

By 1985, Sosnoff traded his way to his first million at 28 years of age. From there it got better. “My best year was 1987 – made a couple of million dollars that year.” Yet his life in the ‘80s wasn’t like the Charlie Sheen movie “Wall Street.”

“It’s not what you think,” he insists when asked about those times. Instead of blowing cash on

‘I knew Sosnoff would push the envelope.

I wanted to be a part of something that could change the world.’

– Tony Battista

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drugs and jet skis, Sosnoff and his trader buddies started some unlikely businesses that included a mattress store, an African gold mine and a pizza parlor.

Eventually, Sosnoff’s fancy turned from pizza to profits. In 1989, he started working with former floor trader Scott Sheridan, who’s now the CEO of tastyworks, a subsidiary of tastytrade. Besides trading, the Sosnoff Sheridan Group managed money so the principals could learn more about the markets. They had $10 million under management and Sosnoff was barely 30. “It went OK, but I didn’t really like it,” he says of that phase. “It was more fun trading for myself.”

But the entrepreneurial itch still needed scratching. In 1999, after 19 years as a floor trader, Sosnoff and Sheridan put together a crew of traders and technologists to build a brokerage firm for retail traders called thinkorswim.

Sheridan had this to say about those days: “Tom is more of a visionary than an entrepreneur, and I mean that in the best of ways. He may come up with Idea A, but that may quickly pivot to B or C with the final product looking nothing like the original idea. That to me is true genius!”

Genius or not, the team had much to learn. “We were just trying to figure stuff out,” Sosnoff reminisces.

“We didn’t have any developers. We didn’t have a lot of stuff.” Somehow, the team managed to create technology that made the markets accessi-

ble and also was developing ways to teach investors how to trade. That union of financial education and accessible trading fueled thinkorswim’s explosive growth.

In 2009, Sosnoff and the crew sold thinkorswim to TD Ameritrade for $750 million. He could have pocketed his eight-figure cut and pursued a leisurely life, but that wasn’t his style. “So I should go to the beach and just do nothing for the rest of my life?” he shot back rhetorically when asked about early retirement.

the next revolution

Instead, Sosnoff bided his time until he could foment another revolution.

In 2011, he rolled the dice and took a risk called tastytrade. The new business found a home in a former hip-hop studio in Chicago’s River North neighborhood. Unsure the business would succeed, Sosnoff and company furnished the space with rented amenities – even the dishes were rented. tastytrade began with the grand ambition of overhauling financial media. Sosnoff made it his mission to do no less than improve the way retail traders think about the markets. To accomplish that he threw a lot of spaghetti at the wall to see what stuck. The key was to put the ideas in front of customers as soon as possible.

“Done is better than perfect” became Sosnoff’s raison d’etre. In his view, it’s better to push a new product, feature or idea out for feedback

‘Tom is a visionary, and I mean that in the best of ways.’

– Scott Sheridan

even if it’s not quite ready for primetime. If an innovation proves worthy, then it’s time to devote countless hours to refining it.

A friend of Sosnoff’s was apparently ready to embrace that credo.

Tony “Bat” Battista, who joined tastytrade in its infancy, now serves as on-air co-host of the tastytrade programing and has been a friend of Sosnoff’s for more than 30 years.

Their work relationship is stronger than most people’s marriages.

If either dies they’ve promised to burn all photos and texts. But why did he take a chance on the unproven venture even if the philosophy behind it seemed sound?

“Because I knew he would push the envelope” Battista say of Sosnoff.

“I had a good job, but I wanted to be a part of something that could change the world or be a legacy. I’ve never created anything, and I’ve always worked alone. To be a part of something bigger is appealing to me.”

To pursue those lofty goals, tastytrade has developed a financial think tank with in-house research staff. The researchers dispense daily content based on liquidity, volatility and probabilistic outcomes. Their findings help flesh out the live, daily tastytrade video programing.

trade school

Some find the tastytrade programming an acquired taste. In one of his televised rants, Sosnoff outlines “The 10 Most Common Reasons for Turning Off tastytrade.” In Reason

A Sosnoff Timeline 1981

Moves to Chicago and becomes a member of Chicago Board Options Exchange

28

1983

Meets future tastytrade colleague Tony Battista

1987

Market crashes

1988

Forms Sosnoff Sheridan Group with Scott Sheridan, who’s now tastyworks Co-CEO

1989

Starts hedge fund with $10 million dollars under management

2000

Launches retail brokerage firm thinkorswim

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No. 5, he admits the content can prove too challenging. In No. 6 he concedes that the research reports may contain too much math.

Yet Sosnoff insists on never “dumbing anything down.” Yet, with thousands of new traders discovering tastytrade’s original content every day, the team acknowledges that new traders constitute an important part of the viewership.

So, they provide programming that helps rookies decipher trading jargon, contemplate trading strategy and parse Sosnoff’s data science.

There’s even a Learn Center to help new traders educate themselves at their own pace for both options and futures products.

It’s a combination of basic and advanced approaches to investing that appeals to a broad audience.

The information is interspersed with enough chatter to make the on-air stars seem like family. “We have a certain relationship that I don’t think any other firm has with their clients in the world of finance,” Sosnoff says.

The relationship requires dedication to customer service, and that’s why Sosnoff provides the content and supports it for free. “A goodwill relationship means I give you something, and you’re going to be very appreciative,” he says. “And then you’re going to give us as much as we gave you – or more.”

Apparently so, as legions of tastytraders pay it forward. Referrals represent the biggest source of new brokerage accounts for tastyworks –

2004

Raises $22.5 million for thinkorswim, giving it a $100 million valuation

2009

Sells thinkorswim to TD Ameritrade for $750 million

2011

the brokerage that’s a subsidiary of tastytrade but operates separately.

“That’s our game plan and it works,” Sosnoff says of the arrangement. “Does Fidelity operate that way? Schwab? E-Trade? No, they can’t give too much. They have their model, but we found our niche.”

the road show

Besides streaming the daily programs, tastytrade’s hosts hit the road regularly and travel across the nation. “The live shows are worth it,” Sosnoff says of the effort involved.

Creates tastytrade online programing with co-CEO Kristi Ross

2014

Wins Ernst & Young Entrepreneur of the Year along with co-CEO Kristi Ross

“People want to know that you’re real.” The team expects to stage 27 free live events this year.

Customer appreciation takes other forms at tastytrade, too. Sosnoff and his support team respond to email messages within hours, if not minutes. He estimates he spends half his life answering email and the other half contemplating lunch.

The sacrifices are part of an aggressive approach to business – and to life in general – that seems to work. As its audience continues to grow, tastytrade is becoming one of

2014

Raises $25 million from Technology Crossover Ventures

2017

Launches tastyworks, a brokerage that’s a subsidiary of tastytrade

Sosnoff (inset) didn’t just thrive in the chaos of the trading floor. He found a home there.

2018

Raises $20 million to keep creating innovative financial concepts

2019

Starts Small Exchange for customerdriven futures trading

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‘Our viewers love the rawness, the honesty and the brutality of our live shows.’

– Tom Sosnoff

the few true disruptors in financial brokerage and media.

Just the same, an underdog mentality persists. Maybe it’s because Sosnoff advocates for self-directed investors, empowering them with new skills and protecting them from the noise of traditional financial news.

Sosnoff insists that with traditional financial news, “there’s no

learning, no wealth creation, no strategy and nothing applicable to true investing.”

But there’s no need to wait for a new generation to take up that cause.

Sosnoff’s already hard at work on the task. Call him whatever suits the occasion – entrepreneur, visionary, disruptor, altruist, maverick, oracle, performance artist. But to the tens

of thousands of active investors who rely on Sosnoff’s daily delivery of essential insights, he is undeniably their “rock star.” And in achieving that status he also has managed to change the face of finance forever for active investors.

Vonetta Logan is a writer and comedian who appears daily as a co-host on the tastytrade network. @vonettalogan

Watch Tom talk tastytrade

Sosnoff’s approach to financial media: ‘Our message has always been that once people can trade, swim, fish or hunt, they welcome man-made market crises as opportunities and laugh at the people spreading the nonsense. The biggest financial threat has three parts: Lack of understanding and know-how, aversion to risk, and lack of decision-making confidence. If the next generation of financial leaders is going to do something special, they need to start now by engaging people in the world’s greatest free market.’

30

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Tom’s Take

By Josh Fabian

If 2018 started with a boom, it ended with a thud. The S&P 500 closed the year just shy of 2500, down nearly 8% and a far cry from the 21% gains notched in 2017. The fourth quarter was one of the most volatile periods in recent memory. Yes, volatility returned in all its glory. After spending much of 2017 below 12.5, the mean on the VIX rose over 30% in 2018 to 16.5. luckbox sat down with Tom Sosnoff, co-CEO of tastytrade, to get his thoughts on the remainder of 2019.

The late John Bogle, who founded Vanguard and invented index funds, warned before his passing that corporate ownership of index funds may soon exceed 50%, which in his view “would not be in our national interest.” Your thoughts?

Tom Sosnoff: I didn’t agree with Bogle on a lot but on this one I absolutely agree. Passively investing money does nothing to help anyone. We learned that with the housing bubble when everyone just bought homes thinking they couldn’t go down in value. We’re seeing the same paradox with passive index funds. No one understands the risk and no one is doing anything to prepare for an eventual pullback in the markets. Our theme at tastytrade is centered around enabling self-directed retail traders so they understand how to maximize their money and how to recognize and assess risk/reward.

That’s just the nature of capitalism and the competition it facilitates. As these companies grow, they become less nimble and it becomes easier for a disruptor to enter the market and exploit inefficiencies. I’ve been saying for the last year that Amazon is ripe for disruption and I still think that’s the case.

Do self-directed investors really need another brokerage firm?

Of course not. Does the world need another fast food restaurant or another airline or whatever? The answer is always no until you see what innovators and disruptors can do to static, stale industries. Then, as consumers you are forever grateful. tastytrade has not only challenged the brokerage industry with HFT technology but it’s also changed the nature of live content and it’s lowered fees for customers of every firm.

How are you positioning yourself to take advantage of those opportunities?

Staying small and playing all my core hunches. You never know which ones will work out. It’s all about creating enough occurrences for the math to play out.

Are Google and Amazon getting too big? Should they be split apart?

I’m not sure it’s a matter of too big.

I think it’s more that both are ripe for disruption. Neither company has really been challenged. But no company enjoys a monopoly forever.

Looking forward to the next six to 12 months, where do you see the greatest opportunities?

I think the flattening yield curve will begin expanding and long-term rates will rise more than short-term rates. Expect across-the-board volatility contraction. Crude oil and its respective stocks. I’m getting short bonds. As a contrarian, I’ll get long on some of the worst performers of 2018.

I’m also looking to get long small caps versus the S&P 500.

What else can you tell us about your philosophy of frequent small trades?

We all have opinions and beliefs, but that doesn’t mean they’re right. I’ve been doing this a long time and learned my opinions are right, at best, half the time. That doesn’t mean they aren’t worth trading against, but it does mean I should trade against them intelligently, which means staying small. I don’t want one opinion to upset the apple cart, so to speak, if it doesn’t work. By staying small and spreading my trades out

in a number of places, I can lower the volatility of my returns and increase my probabilities of being right.

We saw the return of volatility at the end of 2018. Many thought volatility was dead and we had experienced a paradigm shift.

Do markets ever really change or do they just do a better job of convincing people they’ve changed?

It’s never “different this time.”

I know it’s a cliche but the markets are always searching for reasons and explanations. Sometimes the stocks just win.

What can active investors do to improve their performance?

Stay small. No hero crap. This year will continue to be a trader’s market.

I expect plenty of two-sided tape action, so staying with solid mechanics is the key.

Where will the E-mini S&P 500 futures (/ES) be at the end the year?

At 2350 to 2400.

Is there anything you would advise buying and holding?

Not intentionally. Our style of trading is based on taking advantage of the difference between implied volatility and realized volatility. We aren’t attempting to value a company or industry because it can’t be proven that provides reliable returns.

However, taking advantage of liquid underlyings where implied volatility is high, relative to where it typically rests, is something we can more consistently rely upon. So, if I’m buying and holding something, it usually means a trade isn’t working out.

I’m getting short bonds.

As a contrarian, I’ll get long on some of the worst performers of 2018.

I’m also looking to get long small caps versus the S&P 500. april 2019 | luckbox

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Investors don’t have to turn pro to become proactive…and their portfolios will thank them for it. BY MICHAEL RECHENTHIN & TOM PRESTON 32

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T

Covered call credits

he very thought of stock options can strike terror in the heart of a typical buy-and-hold investor.

“Too risky,” is the common reaction from the underinformed.

But why would investors harbor that irrational fear? Because Wall Street money managers earn billions by discouraging clients from directing their own investments and taking advantage of options. To investors, that represents lost opportunity, or dare one say it, lost optionality. Proactive investors who use covered call options (sometimes called buy-writes) actually take less risk than they would passively buying and holding a stock.

In fact, for the past 26 years properly implemented covered calls have had half the largest annual drawdown of a passive buy-and-hold methodology.

How can covered calls reduce drawdowns by nearly half? What’s the catch? There isn’t one. It’s a transfer of risk. Investors are gaining downside protection and increasing their chances of making a profit in exchange for giving up a bit of upside potential when the stock price increases.

Over time, the credits received by writing calls against a stock position can reduce its breakeven. Do it long enough, and breakeven can theoretically go to zero. ­

Consistent cash credits reduce portfolio risk.

Amount seller of a first out-ofthe-money call receives

Date

Call reduces breakeven in the S&P 500 ETF by this amount:

Dec 3, 2018

$375

1.3%

Nov 1, 2018

$505

1.8%

Oct 1, 2018

$302

1.0%

Think of it this way – if an investor bought a stock for $0, how much risk does it have? $0.

That stock can only go up and make money.

So, the lower the cost (or breakeven point) of a stock, the better. One of the most effective ways to lower the cost is to sell calls against a stock.

Take a look at “Covered call credits,” above.

If investors used that strategy during the last three months of 2018, each time the call was sold, they would have reduced the position’s breakeven by an average of 1.4%.

A 1.4% reduction in the breakeven may not seem like much, but that’s for only one month.

Now consider that the dividend yield on the S&P 500 is a little under 2% for the entire

S&P 500 average returns 3000

2500

Average return of the S&P 500 since 2000 is closer to 6%

2000

Average 10-year return of the S&P 500 is 13%

1500

1000

500 Jan 2000

Jan 2002

Jan 2004

Jan 2006

Jan 2008

Jan 2010

Jan 2012

Jan 2014

Jan 2016

Jan 2018

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Passive Risk, Active Control

Covered calls smooth the upside and downside.

Passive Buy-and-Hold

Active Covered Call

Typical Daily Gain

0.61%

0.38%

Typical Daily Loss

-0.62%

-0.30%

53% of days are winners

59% of days are winners

Probability of Daily Gain

year. Some stocks and exchange-traded funds (ETFs) make money on selling the call of up to 3% or more of the price of the stock per month.

That can amount to a breakeven reduction of 25% to 50% per year! The money from selling covered calls is credited directly to the investor’s account. Traditionally, investors have referred to the covered call as “income producing strategies.” Think of it as a way to reduce the stock’s risk and breakeven point in exchange for giving up some upside potential that might have a low probability of happening anyway.

To put that in statistical terms, the gain using

covered calls is approximately 67% as great as with the passive approach, yet the losses are 50% of the passive buy-and-hold methodology. Look at the results shown in the table that appears below.

Now, opponents of covered calls argue that buy-and-hold investors have had average returns of 13% per year – so why bother doing anything else? But that number is outdated – returns are closer to 6% since 2000.

The level of daily or monthly fluctuation within an account is especially important to those seeking a bit more account stability.

That’s not “explained” by just looking at the average return of two strategies. Given the choice between two hypothetical funds with the same amount of risk, most prefer the fund with the higher average return. For example,

Proactive strategies like the covered call can reduce monthly swings

Watch the growth

The gain using covered calls is approximately 67% as much as with the passive approach, yet the losses are 50% of the passive buy-and-hold methodology.

Growth of $10,000 over time

$15,000 Fund A Fund B $12,000

$9,000

$6,000

34

2010

2011

2012

2013

2014

2015

2016

2017

2018

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The impact of volatility

Larger drawdowns from passive strategy

Volatility can suppress returns because of larger drawdowns.

Fund A Average Return

Here’s how the covered call helped investors who bought at the highest price of the year and sold at the lowest.

Fund B

6%

Historical Returns

Average Return

5%

Historical Returns

2011

10%

2011

10%

2012

-10%

2012

-3%

2013

-10%

2013

10%

2014

-7%

2014

15%

2015

5%

2015

3%

2016

5%

2016

5%

2017

50%

2017

-5%

2018

5%

2018

5%

investors who look at “The impact of volatility” in the table above usually choose Fund A. That’s because the average return is 6% in Fund A compared with 5% for Fund B. But investors in Fund A will end with a slightly lower balance than in Fund B – even though the average return of Fund A was greater. That’s because the yearly swings and drawdowns in Fund A were greater than Fund B. That volatility reduced overall returns.

When investing, remain cognizant of returns and the volatility of those returns.

Averages alone are difficult to use as comparisons. And that is one of the big advantages of proactive strategies like the covered call – the reduction of the monthly swings (i.e., lower volatility) in the account balance. For retirees or those who need immediate access to cash, the covered call can reduce account balance fluctuations.

Let’s get back to a real-world example. Take a look at the worst drawdowns per year. It is the fear of buying the high every year and then selling at the absolute low. No one wants to be the guy who does that. If investors really knew that drawdowns in the S&P 500 have been as big as 56.5%, many would never put money into funds. These drawdowns are related to volatility – and it’s the reason we have to look

Year

Long Stock

1993

-6.8%

4.7%

1994

-9.1%

0.2%

1995

-4.2%

2.2%

1996

-10.5%

1.8%

1997

-31.2%

3.1%

1998

-45.2%

8.7%

1999

-53.6%

24.6%

2000

-55.6%

32.5%

2001

-50.6%

32.5%

2002

-42.1%

24.2%

2003

-38.8%

17.8%

2004

-43.9%

24.1%

2005

-46.7%

28.7%

2006

-52.4%

35.9%

2007

-56.5%

40.1%

2008

-53.0%

40.1%

2009

-9.3%

10.2%

2010

-12.7%

11.2%

2011

-19.4%

0.7%

2012

-7.8%

6.0%

2013

-5.7%

4.1%

2014

-12.4%

7.2%

2015

-14.4%

9.7%

2016

-1.9%

0.8%

2017

-12.6%

9.3%

2018

-19.8%

15.2%

-27.5%

15.2%

Average Drawdowns

Covered Call

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Entry point

ETFs can be a lower-risk place to start using the covered call strategy.

Index

Symbol

Description

S&P 500

SPY

Considered by many to be the best-gauge of the U.S. economy. It represents 500 large-capitalization stocks with a combined value of over $23 trillion.

Russell 2000

IWM

Comprised of 2000 small capitalization stocks. Tends to have larger swings day-to-day than the other indices.

Dow Jones

DIA

One of the oldest indices and one of the most widely followed and quoted. 30 mega-capitalization stocks.

Nasdaq 100

QQQ

A very popular index comprised of 100 stocks.

at more than just average returns, as readers can see in the table called “Larger downdowns from passive strategy” on page 35.

Now, investors who used a slightly more active approach such as a covered call, had significantly greater stability. Losses weren’t as great – in fact, a covered call strategy has less risk than a passive, buy-and-hold investment philosophy. While the worst drawdown in the passive approach averaged 27.5% since 1993, the drawdown in the active covered call strategy averaged 15.2%.

So put the proactive covered call into practice! First, decide on a stock or ETF that seems

worthy of a bullish approach. Some possibilities appear at the left in “Entry point.”

Why are there only ETFs on the list? Index ETFs provide greater diversification and less company-specific risk – in other words, one or more stocks can go bankrupt, and the entire position won’t be lost. ETFs can be a safer choice for first-time investors.

Next, decide upon a level of bullishness to determine what call strike to sell. While covered calls are always bullish strategies, the strike selection is important. The more bullish the assumption, the higher the strike to sell.

The more neutral the assumption, the closer to the current price, or closer at-the-money, is the strike to choose. A quick guide appears below in “From theory to practice.”

The numbers speak for themselves. As an individual investor, employing a proactive covered call strategy can make a lot of sense.

Lower risk, higher probability of profit and a tighter connection to the portfolio combine to create increased optionality.

A covered call strategy carries less risk than a passive, buy-and-hold investment philosophy

From theory to practice

EFTs provide cheat sheet for the covered strategy.

36

Outlook

What Strike to Sell

Advantage

Disadvantage

Very Bullish

5 to 10 points above the current price of the stock.

Because the strike is considerably above the last sale, the upside potential is great.

In exchange for a higher profit potential, a lower credit is received from selling the call at that strike. The breakeven of the stock is reduced less.

Bullish

2 to 5 points above the last price of the stock.

By selling the call at a strike above the last sale, this offers a nice combination between profit potential and downside protection.

This is a common approach with relatively few disadvantages. The only real disadvantage is missing out on profit potential if the stock rallies higher than the strike.

Neutral

At or slightly above the last price of the stock.

The credit from selling the call is high.

This results in a lower breakeven.

Although the breakeven is lower for selling the call, the upside profit potential is not as great.

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CRYPTOCURRENCIES

CRYPTOCRITICAL After the latest meltdown, a financial pundit weighs in on crypto’s capers.

By Wolf Richter

38

Bitcoin and cryptos in general might look like a magnificent bubble that imploded in 2018, but the word “bubble” doesn’t really apply. Actually, purveyors of cryptocurrencies have scammed victims into paying a lot of hated fiat currency for an essentially useless digital “money” whose “value” is dissolving. Only those who got out in time made a killing.

Cryptos are “decentralized.” That was one of the major selling points in promotional whitepapers full of intelligent-sounding gobbledygook and propaganda peddled by an army of crypto trolls and hired celebrities.

Because cryptos are decentralized, everyone can create his or her own, and all kinds of outfits are mining new units of existing cryptos. On some levels, it’s really just a big joke.

But the pain is real, and the numbers are substantial.

There are now more than 2,100 cryptos, according to CoinMarketCap, up from 1,926 in September, 2018; up from 1,400 in January, 2018; up from 1,000 in October 2017; and up from just a handful a few years ago. Cryptos are multiplying like rabbits – though since the collapse began, the process has slowed. And hundreds of cryptos have already turned into digital zombies.

Market cap for each crypto is figured by the current number of coins, multiplied by the current price.

Since mining creates new coins all the time, it also creates new market cap. The whole process turns market cap into something theoretical.

Nevertheless, here goes: On January 7, 2018, market cap was $833 billion. Today, as of this writing, market cap is down to $115 billion.

That means more than $700 billion

in value has simply disappeared. The good thing for the U.S. economy is that much of this market cap destruction has hit people around the globe, and people in the U.S. got whacked by only a portion of it.

This has been such an obvious scam that even I could see it on the way up, and I have written about it frequently. The articles attracted lots of crypto-trolls. Lots of them are lurking because that, too, is part of this scam: Everyone has to promote it.

Some of those crypto-promoters are paid, such as John McAfee who admitted in March 2018 that he charged $105,000 per crypto-promo tweet.

Others did the promos for free, hoping to do their part to drive the price of their crypto into the stratosphere and be compensated that way.

And for a while, some befuddled reporters in the mainstream media, in love with “new technology” or whatever, supplied the super-horsepower needed to power the scam.

Bitcoin holdings are concentrated among a relatively small number of large holders, such as bitcoin miners, hedge funds and family offices. Many of the hedge funds and family offices piled into it in early and mid-2017.

Then they “leaked” to the media that they’d bought into it. The media then published breathless articles about these smart folks, and how they’re accepting this new technology. This created even more hype and drove up the price further.

But there’s no liquidity in cryptos.

Just as the hedge-fund purchases in 2017 caused prices to multiply due to lack of liquidity, efforts to get out from under these positions have caused the prices to collapse. That second part is apparently something these folks didn’t think about before.

In other words, these hedge funds and family offices are stuck, unless they want to cause the price to collapse further.

Cryptos will bounce again, as they have before, just enough to give folks

PHOTOGRAPH: REUTERS/CHRISTINNE MUSCHI

worker strolls past a wall A of miners at the Bitfarm cryptocurrency operation.

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some hope, before they collapse again when some of the big money is gingerly trying to get out without totally crashing the entire space.

For anyone trying to get some money out of the crypto space, new money – dollars, euros, yen, won, etc.

– must flow into the crypto space in the same amounts. And Fed Chairman Jerome Powell, during his testimony before the House of Representatives Committee on Financial Services last July, was asked about cryptos. Instead of pussyfooting around the issues, as Fed chairs used to do, he refreshingly stepped into it with both feet.

Whatever limits they might have, “cryptocurrencies are great if you’re trying to hide money, or if you’re trying to launder money,” Powell said, from a regulator’s point of view.

Whatever they are, they’re not functional currencies. “Cryptocurrencies are not really used very much in payment. Typically, people sell their cryptocurrencies and then pay in dollars. In terms of a store of value… look at the volatility. It’s just not there.”

But the Fed doesn’t have jurisdiction and Fed chair Jerome Powell

It’s becoming harder to get the public to throw money at the cryptocurrency scam doesn’t want it. He’s on the record as saying it’s on Security and Exchange Commission turf because of the investor protection that’s involved.

The Treasury Department and the Financial Crimes Enforcement Network could also regulate it, he says, adding that, “I don’t see us as the right group to do that.”

Wolf Richter, editor in chief of wolfstreet.com, writes about business and finance with an eye toward exposing shenanigans, entanglements and opportunities. @wolfofwolfst

Hypocritical?

In February, JP Morgan announced plans to launch JPM Coin despite the blistering criticism that CEO Jamie Dimon has leveled at bitcoin. For the most part, the financial media covered the news inaccurately, either by pointing to Dimon’s supposed hypocrisy or defining JPM Coin as a new cryptocurrency. luckbox asked Wolf Richter to sort it out.

JPM Coin is not a cryptocurrency and doesn’t fit into this discussion, Richter says. So it doesn’t need to be mentioned in the same breath with those scams.

JPM Coin is strictly a blockchain-based payment system. It involves no “mining,” no exchanges and no “wallets.” It cannot be traded. It requires that both the sender and the recipient have bank accounts with JPMorgan. The system simply converts dollars in the sender’s account into JPM Coins for the blockchain, and then the recipient converts them back into dollars, both at 1:1.

It was created so that JPMorgan could use the blockchain technology for payments. Processing payments over a blockchain “requires a digital currency, so we created the JPM Coin,” JPMorgan said.

no hocus pocus There’s no cryptocurrency-magic to JPM Coin. It’s just an instantaneous payment system that works over a blockchain network. You have to have the dollars in your JPMorgan account before the transaction. You exchange them into JPM Coins 1:1 and then send those coins to another JPMorgan account holder who exchanges the coins back into U.S. dollars 1:1. And it all happens within a very short time.

It’s free for both the sender and the recipient. It’s instantaneous. It’s easy. And the recipients get nearly instant notification that the money has arrived in their accounts. This money can be used immediately, and the recipient doesn’t have to wait one, two or three business days as with checks or other payment forms.

Senders can’t cancel payments they made to a Zelle participant (though they can cancel it if they tried to send the payment to a non-participant). It works – I use it.

banishing the fee gougers If you’ve ever dealt with PayPal as a recipient, you realize what a gouge it is.

And if you’re a merchant or restaurant owner and take credit cards, you realize what a gouge they are – and they’re going to be an even bigger gouge starting in April because Visa, MasterCard, and Discover are going to raise their processing fees.

It’s time that modern instantaneous payment systems that are free for the sender and the recipient replace the gouges. Let the best solutions prevail. And if people need to charge something, banks can create a loan account attached to their payment system, so that folks can use these new methods and throw out the credit cards that are taking a cut out of every transaction.

Customers may not see that cut directly since merchants pay it, but they feel it because merchants pass that expense on to their customers via the prices they charge. And even cash-paying customers feel that fee in their wallet because they pay the same price.

Banks would love to avoid having to pay these fees. It may be that once they get the kinks worked out of whatever payment systems prevail, blockchain-based and/or other, those credit card companies are going the way of Friendster.

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BOOK VALUE

MONOPOLY CAPITALISM IS BACK

BY JONATHAN TEPPER AND DENISE HEARN

In their new book, The Myth of Capitalism: Monopolies and the Death of Competition, authors Jonathan Tepper and Denise Hearn argue that capitalism is the greatest economic system in history but lament that “capitalism, without competition, is not capitalism.” In this excerpt from Chapter 5 of that book, they denounce monopoly power in Silicon Valley, a place where politicians and regulators apparently fear to tread.

Who will guard the guardians?

— Juvenal, Satire VI, lines 347–348 Given that Google is the doorway to the web, the search engine can effectively shut out competitors by demoting them or by taking their data. Google is using its dominance in one product area – universal search – to move into other markets.

Economists call this “bundling,” which historically has been illegal.

Google’s power over what consumers see on the Internet is vast and extends far beyond the desktop search function. Its Android mobile operating system powers most smartphones in the world with a whopping 85% market share. It has tied the Android operating system to its own search engine, and it has tied Android to its own app store, effectively becoming the gatekeeper to what apps and companies consumers can access.

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It uses its dominance in browsers to its own advantage as well. Its Chrome browser has 60% market share globally. Google’s Chrome browser will block certain types of online advertisements. It is also now effectively the gatekeeper to what kind of ads consumers can see. Mysteriously, the ads that are blocked are the kinds its competitors use, but not its own.

Google argues its new ad blocking is the work of a collective, industry-wide effort to get rid of annoying ads. However, through its dominant position with Chrome browsers, Google can block competitor ads and allow its own. They are creating a standard that doesn’t apply to them.

Google now controls nearly 90% of search advertising, and Facebook almost 80% of mobile social traffic. The two companies captured almost 90% of the digital advertising

growth last year. An astonishing 45% of Americans get their news from Facebook. When you add Google, over 70% of Americans get their news from the two companies. The two companies have more information on their users’ likes, preferences, political beliefs and personal relations than any government spying agency, and they track users across the web with a complete history of what people see and search for.

In e-commerce, Amazon is by far the largest player, with an estimated share of 43%. Last year, Amazon accounted for 53% of all the incremental growth of online shopping.

One study indicates that more than half of all product searches start on Amazon. They are already in a monopoly position in book sales. Amazon gets about 75% of e-book sales.

Google, Facebook, and Amazon have great technology, but much

Google, Facebook, and Amazon owe much of their success to regulatory and antitrust mistakes

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of their current status and financial success comes from regulatory and antitrust mistakes. Amazon was allowed to buy dozens of e-commerce rivals and online booksellers to give it a monopsony position in the book industry. Google was able to buy its main competitor Doubleclick and vertically integrate online ad markets by buying advertising exchanges.

Facebook was able to buy Instagram and Whatsapp with no regulatory challenges. In no small degree, nonexistent antitrust has allowed them to achieve their dominance.

The scale of digital platforms puts them in a completely different category from the companies they compete against. Frank Pasquale, a professor of law and expert on digital platforms, has noted the tech behemoths are essentially functioning as governments now. “They are no longer market participants.

Rather, in their fields, they are market makers, able to exert regulatory control over the terms on which others can sell goods and services.

Moreover, they aspire to displace more government roles over time.”

Apple and Google determine what apps can be sold through the app stores on iPhones and Android, effectively regulating billions of phones.

Facebook has more than two billion

The Myth of Capitalism: Monopolies and the Death of Competition

By Jonathan Tepper & Denise Hearn $27.95, 320 pages

This important book calls for regulatory intervention to achieve truly free competition and open markets

people and its completely opaque algorithm determines what posts are viewed and which are not. Google’s YouTube has restricted the speech of prominent conservatives and had their content censored or demonetized. In most cases they are not even given grounds for their punishment or a means of appealing it. Facebook’s Community Standards project puts the company in the position of deciding arbitrarily what speech is acceptable and what is not.

We may fool ourselves into thinking that Facebook and Google use fair, impersonal algorithms to monitor speech. But algorithms are programmed by people, and people are imperfect and have biases. The left may be happy that conservatives are censored today, but who will control these platforms in five to 10 years? And who will prevent these giants from cooperating with countries that censor their own citizens?

Outright censorship is not so outlandish. According to the New York Times, Mark Zuckerberg has been learning Chinese. More important, the social network has quietly developed software to suppress posts from appearing in people’s news feeds in specific geographic areas. “The feature was created to help Facebook get into China, a market where the social network has been blocked.” Zuckerberg has supported and defended the effort. In 2014, Facebook complied with a Russian government demand to block access to a page supporting Russian opposition leader Alexei Navalny.

These companies are effectively a government unto themselves. In legal circles, the term private government is most commonly associated with Robert Lee Hale. “There is government,” he wrote, “whenever one person or group can tell others what they must do and when those others have to obey or suffer a penalty.” Under Hale’s definition, the tech giants are effectively governments unto themselves.

Jonathan Tepper founded Variant Perception, a resarch group for asset managers. Denise Hearn consults on economics and systems change.

UNDER PRESSURE Capitalism is facing a demographic headwind: Millennials Given the choice, most Americans would choose to live in a capitalist country, but that’s not the case with millennials, according to the Annual Report on U.S. Attitudes towards Socialism conducted by the Victims of Communism Memorial Foundation.

Among millennials – the generation now 23 to 38 years old – 51% favor socialism or communism, compared with 42% who prefer capitalism, the study indicates.

“The significance of this finding cannot be overstated: the largest generation in America would rather live under socialism or communism than under a free market system,” said a report from YOUGUV, a public opinion firm that worked with the foundation to produce the report.

Preferred economic systems.

Communist

All adults

3%

Fascist

4%

Capitalist

59% Socialist

34%

Millennials

% 53 of millennials say the U.S. economy works against them

Communist

7%

Fascist

7%

Capitalist

42%

Socialist

44%

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trends life, luxury & the pursuit of happiness

PHOTOGRAPH BY TRAVIS SHINN

Greta Van Fleet includes (from left) Jake Kiszka, Josh Kiszka, Danny Wagner and Sam Kiszka

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RECORD HIGH

Hip hop and rap have surged in popularity in the past 15 years, outpacing rock, pop and country to become America’s most-streamed musical genres. But a Grammy-winning outlier is bucking music-industry trends.

Rock’s Revivalists: Greta Van Fleet

By Ed McKinley

eaders of a certain age can remember the “Generation Gap.” In the late ‘60s and early ‘70s, the young and old could barely communicate across the chasm that separated them. Parents couldn’t fathom their own offspring’s long hair, leftist politics, Eastern religion or macrobiotic meals – let alone a sense of fashion seemingly inspired by Native American fringe and beads. Meanwhile, their kids rejected what they viewed as older folks’ dull, mindless, materialistic conformity.

But one of the biggest disconnects was music. Older generations had come of age consuming a musical diet of soothing horns and comforting strings. They listened contentedly to melodious tunes and inoffensive lyrics meant to relax audiences, rather than challenge or incite. In sharp contrast, the kids were captivated by wailing guitars, screeching vocals and provocative lyrics – all of it backed by pounding, jarring rhythm.

A few in the generation that came of age in the ‘60s and ‘70s went so far as to base their identity on music.

Rock fueled their rebellion, reflected their hedonistic lifestyle and announced their rejection of everything they considered out of date.

But lately rock has fallen on hard

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times, the victim of the rising popularity of both hip hop and pop. In 2017, rock accounted for 19.8% of the singles streamed online, right behind hip hop’s 20.9% market share, according to BuzzAngle, a company that tracks music consumption. Last year, however, hip hop dominated with 24.7%, pop rose to 19.0% and rock nose-dived to just 11.7% immune to the downturn A new rock band from Frankenuth, Mich., seems unaffected by the genre’s downward trajectory. Greta Van Fleet, a group composed of three brothers – Josh, Jake and Sam Kiszka – and a fourth member, Danny Wagner, is scaling the heights of stardom.

Greta brings together concert audiences that span the generations and won this year’s Grammy for best rock album for From the Fires, beating out fellow nominees Ghost, Weezer, Alice in Chains and Fall Out Boy. From the Fires, a double EP, includes four songs from the Greta’s first EP, Black Smoke Rising, and four new songs. The double EP offers tunes that range from a cover of Sam Cooke’s A Change Is Gonna Come to Greta’s own smash songs, Highway Tune, and Safari Song – both compelling riff-laden rockers that bring audiences to their feet and

reached No. 1 on the Billboard Mainstream Rock Songs chart.

Late last year, the band released its debut full-length studio album, It’s the best Anthem of the Peaceful Army, which rock and roll peaked at No. 3 on the Billboard 200 chart with sales of more than 80,000 I’ve heard in 20 copies. It included When the Curtain f**king years.

Falls, another single that climbed to No. 1 on the Billboard Mainstream These guys are Rock Songs chart. so talented, Greta has achieved that success even though most members of the they take my band haven’t reached the federal breath away.” legal drinking age. Baby Boomers — Sir Elton John who find themselves intrigued by the band’s similarities to Led Zeppelin but skeptical of GVF’s youth might want to keep something in mind: Zeppelin’s Robert Plant was 16 when he left home and moved from band to band until joining the fledgling Led Zeppelin in 1968 – when he was 20.

FOUR GRAMMY NOMINATIONS, ONE WIN their own vision It has to be daunting, discouraging GVF was nominated for and boring for members of Greta to best rock song hear themselves endlessly compared for Black Smoke Rising, with Led Zeppelin and Rush. Sure, best rock performance the Greta vocals that Josh screams for Highway Tune, and can seem a bit similar to the soarbest new artist. The ing complaints of Zeppelin’s Robert group won the grammy Plant and Geddy Lee of Rush. Greta’s for best rock album for riffs can sound familiar, too – they From the Fires. share something with a lot of clas-

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sics of Classic Rock. But it’s important to remember that Led Zeppelin borrowed so heavily from Willie Dixon and other blues masters that the English band was accused of plagiarism.

Besides, harping on who’s copying whom wastes precious time. It’s like citing Albert Einstein’s accomplishments to a physics major or telling a member of the debate team she sounds like Michelle Obama.

Who needs it? Some can remember high school English teachers who condemned comparisons as “odious.”

That may or may not have suggested that comparisons smell bad, but whatever that word “odious” means, teachers were making the point that true understanding requires examining art on its own merits instead of distorting it through the lens of something that came before.

Listening to just a few bars of a Greta Van Fleet song can form an immediate connection to the band.

They’re rocking at a moment dominated by hip hop and by ballads that somehow combine the bland with the overwrought. Greta’s very existence suggests that rock in general isn’t nearly so endangered as many seem to believe.

Greta Van Fleet gave birth to a sound that’s almost universally identified as neo-classic rock, but members of the band say they did it by combining disparate musical traditions. Jake, the guitar player, favors rock and roll; Sam, the bass and keyboards player, likes jazz; Danny, the drummer, prefers folk; and Josh, the lead singer, is attracted to world music. “It’s not like we set out to be a rock and roll band,” Jake said in a published interview.

“It’s just that sound that comes out [when] we get together and play.”

Watch GVF perform their breakout hit Highway Tune

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LUCKBOX LEANS IN

GRETA’S GUITARS

By Jeff Joseph

Sam and Jake Kiszka, two of GVF’s three brothers set aside time with luckbox to discuss music, fame and influences. Sam plays bass and keyboards for the band, while Jake handles lead guitar.

Sam: Ok, let’s do this. I ‘ve been finding some of these music questions hilarious.

Well, I’m not going to ask you about Zeppelin, but, who are your other musical icons?

Jake: My first guitar icon was Eric Clapton. He marked the first time that I discovered who I wanted to be. I was around 12 years old. I was sitting on the carpet with my dad, and we were watching a Creedence documentary.

They were in a class by themselves.

And at that point, I kind of knew it. I’m like, I want to be that guy. So yeah, Clapton was the first one, and then Pete Townshend and Rory Gallagher.

Sam: On bass guitar, I would have to say James Jamerson. I grew up listening to that stuff. Eventually, I figured out that Jamerson played the base part in so many songs that I knew and loved. Also, I think Robby Krieger is one of the most fantastic guitarists, one of the most inventive and the most unpredictable guitarists I’ve ever heard. His sound was the heart of the Doors – eerie, weird, jazzy. Scary at times but sometimes beautiful. He’s one of the most underrated guitarists of all time. Great writer, too. [Krieger had a writing credit on Light My Fire and Love Me Two Times] Who’s the most underrated performer in rock music?

Jake: Quite a large handful of artists are underrated. There’s a Swedish band called First Aid Kit. Fleet Foxes is another one.

It’s been an amazing trajectory for the band. What was the moment that you felt you had broken through?

Sam: I was in high school and during spring break we went to New York to these fancy label meetings, It was my first time in New York. It was the first time meeting the label and I thought, “Here I am.” I was 17 when I signed that contract. And then I was in Florida and hung out with my buddies who had a house down there. I was sitting there at midnight and it was the coolest thing to hear Highway Tune on the real music platforms like Spotify and Apple Music.

I was like, “Wow!” Desert island—one album. What is it?

Jake: I’m going to say The Who’s “Live at Leeds.”

Sam: I would have to say Crosby, Stills and Nash, the debut “Couch” album.

I think that I’ve been listening to that forever. And since eighth grade that’s really what kind of got me into writing music. I think those are some of the most beautifully written songs of all time. You’ll sit down and try to dissect every little bit, and you’ll never know everything about it. It’s just one of those records.

Do you guys feel like an overnight success?

Sam: Many say there’s no such thing as an overnight success. However, to the public it feels that way and to us it honestly kind of feels that way too. We have been in the public eye for about a year and a half or maybe two years now, and before that we were grinding

PHOTOGRAPH BY KOURY ANGELO

our teeth in biker bars for four years.

But it wasn’t really grinding anything.

It was so fun. We would take the van down with all the gear loaded up.

Our parents would come with us and help us set up and make sure that we weren’t going to get beaten up. But the bikers who showed up were always really nice to musicians.

Jake: But the fact is we actually did feel like it’s kind of overnight. It’s been such a whirlwind, given the perspective of how long we’ve been a group. It’s been about six years together. We were always trying to grow independently as musicians, it was never focusing on being successful in the industry. Out of that came something completely unexpected. So it certainly feels like it was an overnight success.

Give us a badass rock and roll story.

Jake: We saw a lot at those biker bars in the backwoods of Michigan. People would be firing guns off, doing all kinds of different drugs – a crazy breed of people. There was a lot of chaos at those shows, for sure.

Sam: At those bars, a lot of really adult things were going on when we were not adults. I must have been 13 the first time I stepped foot into a bar to play music.

You had the drug dealers, and there were the guys who would go in the bathroom and do some coke or whatever. But from our perspective

at the front of this little stage, it was like everybody loved it and we loved playing it. That’s really where we got our start knowing each other musically. This is when I learned exactly what Daniel, Josh, and Jake were going do at any given moment.

And, we learned to improvise.

What’s the best live performance you’ve ever seen?

Jake: Paul McCartney at the ACL (Austin City Limits) Festival. He’s really a great performer.

Sam: The best live performance I’ve ever seen? Honestly, it was really recent – Florence and the Machine.

Really, really blew me away. Her performance is absolutely nuts. And my jaw was just disconnected from my face. And I just could not believe what I was seeing. The way she interacts with fans and the way that she sings and the songs and the music are incredible.

You can tell it has a very classical, mature edge to it but a lot of it is in the realm of pop. And it creates a whole new style of music. And, yeah, I was absolutely blown away. So I would say that’s the best live show I’ve ever seen.

Elton John suggested extending the opening of Highway Tune. What was other advice did he give?

Jake: Elton told us we should “flaunt what we’ve got.” I think that’s when our shirts started coming off on stage.

GUITAR HEROES WANTED Guitar sales have declined from 1.5 million annually a decade ago to just a little more than one million a year now, forcing Fender, Gibson and other manufacturers and retailers into debt.

The cure?

New guitar superstars to inspire emulators.

You recently called this the best job in the world, What’s the worst thing about success?

Sam: It’s those things that you didn’t really know you are signing up for.

Sometimes all you want to do is feel like a regular person. Do laundry or do the dishes or whatever. Cook your own meal and or just go to a restaurant and hang out and be normal for a minute. It’s hard to come by that and that’s why it’s nice to go home and just hang out with old friends and family. And experience the things that you experienced before all of this happened.

People of all ages attend your live performances.

Jake: Yeah, it’s all-inclusive music. It’s one of the most sustaining things to us to be able to look out into the audience and see a multigenerational group of people looking back at you, all sharing a moment. And something is bringing all of them together, and that’s the music. It’s a powerful thing to see that unity. There are four guys on the stage playing music, and it’s brought everybody to this one place. It‘s crazy to see and it’s a very special thing.

Thanks guys and congratulations on your success.

Sam: Right on, man. Thank you for having us. It’s cool to be in the first issue.

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VENTURED

As close as you can get to “Siri, mix me a Manhattan.”

finally, a useful robot!

By Ed McKinley he Bartesian ­­— a machine small enough to reside on a kitchen counter and smart enough to mix consistent, high-quality cocktails automatically – isn’t meant to replace artisanal human bartenders. It’s just that skilled mixologists usually aren’t on duty in most homes, stadium suites or marinas.

The idea for Bartesian was hatched about five years ago in Canada, according to Ryan Close, Bartesian company co-founder and CEO. He wasn’t there for the initial stages but tells the tale of two guys who were.

The pair of budding inventors started with the notion that hotel guests would enjoy pouring a wellmade cocktail in the comfort of their rooms just as easily as they brewed a bracing morning cup of coffee there.

Both inventors had tended bar professionally so they knew something about drinks. Moreover, both happened to hold engineering degrees and MBAs and could thus grasp a mixology machine’s technical aspects and fathom its financial potential. “Two smart dudes,” is how Close describes them.

One of the aforementioned dudes, Bryan Fedorak, cofounded the Chicago-based Bartesian company with Close. The latter brought small-business sales and marketing experience to the startup. They had met when both were members of Communitech, a community-funded tech incubator in Waterloo, Ontario.

After falling into a long conversation with Fedorak about the invention, Close considered the device “brilliant” and soon elected to commit himself to the complicated

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task of helping to bring it to market.

Still, it couldn’t have been an easy decision because of the sacrifices and uncertainty involved. taking a risk “I wasn’t sure I wanted to take the leap of faith,” Close admits. For a decade he had been commuting to Toronto where he “made good money” in a sales and marketing gig, while also performing small-business marketing services as an entrepreneurial side hustle.

Moreover, Close had a mortgage and three young children to think about. But his wife had finished her Ph.D. in psychology, opening

COCKTAILS ON DEMAND

up newfound earnings potential.

“She saw the excitement in my eyes and blessed me to take the risk,” he recalls. “She said, ‘You go live out your passion. You’ll always regret it if you don’t.’”

So, Close withdrew his savings and cashed in his 401(k), and he and Fedorak set about fine-tuning the Bartesian unit and obtaining patents. At first they planned to do

Bartesian Machine, $299.00

SPIRITED TRENDS 55% of Millennials and Boomers prefer to drink at home 21% of consumers drink at home before going out to a bar 49% are trying new cocktails when they go out Source: On-Premise Alcohol Trends, Mintel Research, 2018

Six Mixer Capsules, $14.99

bartesian.com

GALIFIANAKIS PHOTOGRAPH: BARTESIAN INSTAGRAM

their own manufacturing, turning out the machines and the capsules of ingredients that feed the machines.

But they soon saw that the combined costs of manufacturing and marketing would require more capital than they could amass comfortably.

So they began seeking a deal with a consumer appliance maker. The ideal partner could capitalize, manufacture, distribute, repair and guarantee the Bartesian, they reasoned. “To raise enough money to build all those teams ourselves, you would have to dilute your company or you’re going to have a valuation that’s likely way too high for a pre-revenue company,” Close observes.

Instead, they struck a deal with Hamilton Beach, a venerable behemoth known in the home and commercial markets for blenders, mixers, toasters, slow cookers, clothes irons and air purifiers. “They’ve been around a hundred years,” Close says.

“They’re a big company – solid roots.”

In 2017, the two companies signed a three-year licensing agreement and set about moving the Bartesian machine tools to a Hamilton Beach factory in China. “Luckily, the tooling was good,” Close notes, “so we were able to transition that over.”

Hamilton Beach pays Bartesian a royalty on each machine and serves as the vendor of record to e-commerce channels and brick-andmortar stores that sell the device.

Hamilton Beach is also designing two later generations of Bartesians during the three-year period. raising capital Early investors in Bartesian included Tom Ricketts, who along with other

members of his billionaire family owns the Chicago Cubs and Wrigley Field. In 1975, Tom Ricketts’ father, John Joseph Ricketts, helped start First Omaha Securities, which grew into TD Ameritrade Holding Corp.

Beam Suntory, the Chicago-based subsidiary of Osaka, Japan-based Suntory Holdings, also became an early investor in 2017. Besides Jim Beam, one of the world’s best-selling bourbons, the company produces familiar brands of tequila, vodka, rum, cognac, cordials, pre-mixed cocktails, and Scotch, Canadian and Irish whiskies.

“Seeing billion-dollar companies heavily invested in our small company is a really huge feather in our cap,” Close says. The alliances carry additional benefits, too.

The relationship with the Ricketts could put Bartesians in Wrigley Field luxury suites and behind the counters of the stadium’s beer and food stands. A three-year licensing agreement with Beam Suntory allows Bartesian to co-brand its mix capsules with their well-established brand names.

One step in earning the confidence of those big players came with Bartesian’s successful effort to hold down the machine’s retail price tag down to $299, low enough to make it a viable consumer product, Close notes.

Just the same, Bartesian discovered during beta testing that big commercial interests wanted to become part of the phenomenon. A major hotel chain invited Bartesian to become one of just two companies presenting innovative products at a meeting of 700 hotel general managers. Peter Sears, group president Americas for Hyatt Hotels Corp., is serving on the Bartesian board of advisors.

Whether the machines sell to consumers or to businesses, the company wants to press as many into service as possible. High volume’s especially important because having a lot of Bartesians in the world will create demand for the capsules, which in turn will provide a recurring revenue stream.

Then, too, commercial applications could intensify a particu-

lar machine’s use, Close contends. While a family might have just a few parties a year, fans would occupy stadium suites for nearly every home game or concert, and hotel rooms might fill most nights.

High volume for capsules also requires speed and efficiency on the part of the machine. Bartesian needs just 20 seconds to mix a cocktail, according to Close. “There’s zero warmup time – there’s zero cooldown time,” he continues. “It selfcleans after every capsule. When you put in a margarita, you’re not getting remnants of a cosmo.” At a recent event in Los Angeles, 80 people were imbibing the fruits of the device. “It was a party,” he emphasizes. six cocktails, more to come Capsules for six different drinks are available today, Close says, but the company has already developed capsules with ingredients for several dozen more cocktails, including sazeracs, negronis, and boulvardiers. Capsule releases could generate interest and publicity, he notes. Tying introductions to events would make sense, like offering mint juleps in time for the Kentucky Derby or candy cane martinis for the holidays.

Initial outlets for Bartesians will include several major retailers, and consumers will find capsules in liquor stores, on Amazon and on the Bartesian website. Many major retailers have expressed interest, and Bartesian hopes the machine will become the gift of the year in the 2019 holiday season.

He describes the capsules’ ingredients as “the real stuff – bitters, liqueurs and juices,” rather than powder or concoctions laced with high-fructose corn syrup. The company is aiming for discerning customers, he maintains. “Right now, we’re just focused on delighting the consumer and making life easier when you want to host and have a nice drink,” he says.

Bartesian’s Ryan Close (left) demos the cocktail machine for actor Zach Galifianakis at this year’s Sundance Film Festival.

Seeing billion-dollar companies heavily invested in our small company is a really huge feather in our cap.”

Bartesian’s cocktails on demand

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ARTS & MEDIA

ALPHABRAIN AlphaBrain: How a Group of Iconoclasts Are Using Cognitive Science to Advance the Business of Alpha Generation

By Stephen Duneier $49.95, 304 pp.

this book on the process-driven approach to decision-making is an essential addition to any active investor’s library

Active trading requires discipline, planning, evaluation, decision-making and proper implementation. Veteran traders learn the process through trial and error, and they understand that what they do has only one goal – to make money.

Traders nearly always view the outcome of a trade as uncertain. Experienced traders realize that all things being equal, absent an edge or having probabilities on his or her side, the risk of loss is generally about the same as the odds of making money. The future’s unknowable, and our experience takes us where we can make a compelling case to justify a trade. But once the trade is placed the street decides.

Sometimes a story presents itself and explains why a particular trade did or did not work. More often, no story emerges; there’s just the glorious feel of nailing a trade or the hollow knowledge it bombed.

Trying to avoid the latter, traders often ponder a big question: How can they make better trades? Will the odds improve or opportunities appear with the help of big data or with mathematical, psychological, philosophical or scientific methods?

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With digital and online trading platforms, data management has expanded the marketplace enough to give everyone access to trading. Farming data by pulling together research married to market conditions has spawned trading techniques in which a calculation is always available to suggest what might happen.

These techniques are still evolving but have already made a tremendous difference in personal portfolio success. Yet, after 25 years of personal portfolio management on a significant scale, much clearly remains to be discovered in the pursuit of more certainty in the management of trades. The work toward that goal continues in various fields and is achieving results. The future will, no doubt, be better than the present.

Stephen Duneier describes some of that of progress quite brilliantly in his new book, Alpha Brain: How a Group of Iconoclasts are using Cognitive Science to Advance the Business of Alpha Generation. He makes the case that in trading it’s the decision that matters.

That’s why Duneier maintains that the reason a trader pulls the trigger isn’t as important as how a trader processes the information that underlies the decision. A better process for making decisions is arising from the field of cognitive science, he says.

Traders are at a disadvantage because the human brain is programmed to use shortcuts to decision-making that blend beliefs, hopes, bias, autopilot, intuition and gut feel – all of which the author says, lead to unwise trades.

So, it’s time to find a way of making trading decisions that overturns old notions. But the new way isn’t a bundle of tips or rules or better techniques for trading. Instead, it begins with more precise questions about expectations and factual realities of the trade, which lead to clarity in how the trade is analyzed.

The book is written from the perspective of managing institutional trader portfolios, but active traders can benefit from Duneier’s insight. He reveals his love of his subject matter and buttresses his premises with tantalizing chapters on virtually every trading issue. His subjects include decision analysis, reasons investors should use options but rarely do, trading decisions, and decisions in the financial context.

The chapters build on each issue as the

author drives home key notions with example after example, many taken from trading experiences that worked and or failed.

Here’s the key rhetorical question as Duneier sees it: “With decades of cognitive, behavioral and decisional research proving that we are all vulnerable to systematic errors in judgment, doesn’t it make sense to make the effort to take the necessary steps to improve our decision-making process?”

Happily, he answers his own question: “In order to shift the odds of success in our favor, we must be deliberate in our approach every step of the way. We must be vigilant in our defense against bias and suboptimal selections.”

That’s easier said than done, the author concedes. In fact, that the new approach requires true commitment, not just following an improved checklist, he warns.

With this book Duneier has made a meaningful contribution to the world of investing, but he’s the first to admit it won’t solve every problem. “…There is no magic bullet to decision-making, no matter how people want one…the keys are incremental improvement and fewer mistakes – two skills that can be built with time, awareness and practice. It sounds simple. In fact, it is simple.

But it’s also incredibly difficult.” — Mike Hart Mike Hart, a former floor trader at the Chicago Stock Exchange and proprietary futures trader, specializes in energy markets and interest rates. He’s a contributing member of the tastytrade research team.

British soldiers enjoy a moment’s respite from the horrors of the trenches.

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THEY SHALL NOT GROW OLD

PHOTOGRAPH: WARNER BROS. PICTURES

a must-see documentary for history buffs…a rare look into the hearts and minds of soldiers a century ago

Academy Award-winning filmmaker Peter Jackson has created a time machine of sorts with his new World War I documentary They Shall Not Grow Old. By capitalizing on the newest technology he’s managed to convey the hopes, fears, humor, camaraderie and alienation of soldiers in the trenches of the Western Front.

Moments of abject terror punctuate hours of monotony in the squalid earthen burrows in Northern France. It was an existence every bit as alien to contemporary Americans as the worlds Jackson depicted in earlier directorial efforts, which have included “The Lord of the Rings” and “The Hobbit” trilogies.

For his new film Jackson restored, colorized and applied 3D technology

to images culled from 2,200 hours of World War I film stored in the archives of the Imperial War Museum, .a British institution. The film stock included duplicates of duplicates that required multiple computer-generated fixes.

Besides using wartime film footage, Jackson found ways to tell his story in the actual words of the men who lived and died in “the war to end all wars.” The archives at the museum and the BBC yielded 600 hours of taped interviews with 250 to 300 men. Jackson pieced together their voices to narrate the movie, instead of hiring historians or celebrity hosts for voiceovers.

To re-create dialogue in scenes where soldiers are speaking on film, professional lip-readers were pressed into service to determine what was said. Actors who lipsynched the soldiers learned accents appropriate to the regions the soldiers called home.

Besides using the soldiers’ own voices for narration, Jackson sought to capture the appropriate “voices” for the weapons seen in the film.

He reproduced the sounds of the specific firearms and explosives seen in the movie intead of relying on the usual technique of substituting “generic” battle sounds captured from random firearms.

While making the movie, Jackson discovered that the soldiers of the opposing sides realized they had much in common. Whether German or Allied, every soldier suffered in the squalor along the edges of no man’s land. In one scene, German and British medics put hostilities aside and worked together to save the lives of the wounded, regardless of which uniform they wore.

— Ed McKinley

POPULAR SCIENCE fun, smart and varied feature stories, but a sometimes sophomoric design

Proactive investing calls for a broad knowledge of where the world’s headed, and Popular Science magazine can help develop that understanding. After all, the magazine’s editors have been looking to the future for the past 147 years. But be aware that the articles vary widely in sophistication. Take a look at some recent headlines…

Groundhog Day is all about woodchuck sex Six more weeks of Tinder.

What will we name the solar system’s next planet?

Even in space, bureaucracy prevails.

Still, luckbox is fascinated with PopSci’s coverage of the opportunities and challenges of robotics and artificial intelligence (AI). A recent article explains that Skype co-founder Jaan Tallinn, an Estonian-born computer programmer, is working to prevent a literal existential threat to humans in the form of a super-intelligence “breakout” of AI. It’s where “ultra-smart” AIs outpace humans on the evolutionary ladder and dominate their creators the way that humans now dominate apes.

Or worse yet, the machines could simply exterminate humanity. Here are some excerpts from the PopSci article on Tallinn…

Can Super-Intelligent AI Escape Our Control and Destroy Us? The team defending humankind from a killer AI

By Mara Hvistendahl, Winter 2018 “Advance AI can dispose of us as swiftly as humans chop down trees.”

“Tallinn warns that any approach to AI safety will be hard to get right. If an AI is sufficiently smart, it might have a better understanding of the constraints than its creators do. Imagine, he says, “waking up in a prison built by a bunch of blind 5-year-olds.” That’s what It might be like for a super-intelligent AI confined by humans.

— Jeff Joseph

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trends Contestants lined up for a Biggest Loser segment taped outside the White House in 2009.

FINANCIAL FITNESS

the slowest loser hoever collapses first— wins. Sound ridiculous?

Well, it’s exactly what America cheered for every Thursday night on NBC for 17 straight years.

The Biggest Loser has been one of the most popular reality shows of the current millennium. The contestants, ranging from significantly overweight to morbidly obese, were offered once-in-a-lifetime opportunities to work out with celebrity trainers. With Bob Harper screaming in one ear and Jillian Michaels shouting in the other, contestants were pushed to their physical limits in an effort to shed pounds ASAP. They were worked hard and not in a kind way.In fact, TBL sensationalized weight loss, placing it at center stage and training the spotlight on it. But the idolization of taking off pounds led to unintended consequences.

W

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Many contestants wound up with results that were the polar opposite of what they were hoping to achieve.

It all goes back to the two elements Americans hope to control when trying to get into shape: 1. Exercise (the more the better) 2. Eating (the less the better) Understanding that predisposition, the crafty producers at NBC pushed hard to achieve both goals. Neither’s easy to attain, so the show tugged at the heartstrings of the public and quickly became the gold standard for anyone serious about weight loss.

When the lights were on and the cameras were rolling, the trainers compelled their charges to exercise non-stop and eat next to nothing.

It was a lethal combination destined for a dangerous conclusion.

All too soon, adherents to that regime found themselves overexerted, dehydrated, malnourished and exhausted.

Once the gun went off and the contestants shot off the starting blocks, they were on a collision course with all of those unenviable states. At first, they experienced the problems individually, but before long they suffered from them simultaneously.

The pounds quickly fell away, but feelings of uncertainty grew ever more disturbing. Contestants were reaching a level of leanness that, for them, was uncharted territory.

Yet they struggled to embrace the unknown because losing a prodigious amount of weight motivates.

It’s so motivational, in fact, that those who achieve it often don’t know when to stop. They’ll do whatever it takes to keep it going. all pain, no gain But unbeknownst to the contestants, their bodies were changing on the inside as well as the outside.

TBL STATS, SEASON 8 13 of the 14 contestants studied regained weight in the six years after the competition.

Four contestants became heavier than before TBL. New York Times study published in Obesity (2016)

PHOTOGRAPH: REUTERS/JONATHAN ERNST

By Dr. Jim Schultz

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And, it wasn’t the coordinated rush of hormones like estrogen, progesterone and testosterone that accompanies adolescence. No, this was about something else entirely — a cocktail of hormonal imbalances that literally pits a body against itself in a battle for survival.

Metabolic rate: crushed.

Testosterone levels: tanked.

Thyroid output: non-existent.

Cortisol levels: spiked.

That’s 0-for-4. None of that’s good.

Contestants’ bodies became chemistry experiments gone wrong—horribly wrong.

Any prolonged period of insufficient calorie-intake leads to hormonal imbalance, but on TBL, contestants sped along the express lane to those negative consequences.

Take, for instance, Danny Cahill, the Season Eight winner who lost more than 200 pounds before quickly putting 100 pounds back on once he left the show. According to The New York Times, the show left Cahill with a “metabolism slowed so much that, just to maintain his current weight of 295 pounds, he now has to eat 800 calories a day less than a typical man his size. Anything more simply turns to fat.”

So, it’s no surprise that many of the biggest losers became some of the biggest gainers following their appearances on the show. They never really had a chance to do otherwise. the slow burn Instead, a slower, steadier approach to weight loss affords opportunities along the way to mitigate negative effects and avoid a state where the body fights attempts at weight management. Laurin Conlin, a professional bikini competitor, notes that losing weight sustainably is “slower than you’d like and [takes] longer than you think.”

Losing weight properly is steady, strategic and requires a mechanical approach to lifestyle changes. It incorporates “diet breaks” to slow the process even further and to reset hormones to healthier levels.

Don’t make it a race to the bottom to see who can fall the fastest, only to

rebound the hardest.

Quite the opposite. Effective weight loss requires learning to get the most out of the least, to make the eventual transition to “everyday life.”

Yet, The Biggest Loser made it seem otherwise for years before the network finally cancelled it.

If the producers really wanted to help people make lasting, lifelong changes, they might have called it The Slowest Loser. That would have prevented most of the post-show yo-yo effects and might even have allowed the contestants to enjoy the process of getting in shape.

However, that reasonable formula wouldn’t have kept the show on television long enough to complete its first season. Watching contestants endure the monotonous consistency of an effective diet that’s characterized by tiny changes and small victories? No way. Slow and steady isn’t sexy and doesn’t sell advertising.

People want to see fast, furious, reckless abandon that leaves contestants passing out on treadmills and puking in buckets—hormones be damned. from theory to practice And it’s not much different in the world of traders who buy spreads, sell premium and find opportunities. In trading, the storyline’s a little different and the plot varies more, but the characters essentially remain the same.

The “biggest losers?” They’re the

option premium buyers. They’re the gunslingers, the shooters, the guys and girls swinging for the fences with their directionally biased long options and leveraged ETFs. But the “slowest losers?” They’re the premium sellers. They’re the traders who trust the math and let the probabilities play out. They understand that it’s vital to “trade small, trade often”.

As with primetime TV, the shooters get all the airtime but eventually crash and burn. Meanwhile, proactive investors who choose the sure, steady, slow approach can tap into the power of sustainability.

Check this column next month — we will be taking it slow.

Jim Schultz, a derivatives trader, fitness expert, owner of livefcubed.com and the daily host of From Theory to Practice on the tastytrade network, was named North American Natural Bodybuilding Federation’s 2017 Novice Bodybuilding Champion.@jschultzf3

DR. JIM’S GYM TIPS “Everybody’s excited on day 1.

But the secret?

Find a way to get excited on day 100.”

Jim Schultz revels in two pursuits: working out and trading stocks.

The ‘biggest losers?’

They’re the option premium buyers… the gunslingers, the shooters… swinging for the fences with their directionally biased long options and leveraged ETFs.” april 2019 | luckbox

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trends

THE POKER TRADE

know your call options

By Jonathan Little

Little’s A-Q play yields a $1.1 million payday at Foxwoods 2008 World Poker Finals.

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ecreational poker players often assume their goal is to patiently wait for a premium hand and then jam their money into the pot.

However, that’s one of the worst mistakes a player can make. While getting money all-in with the best hand is important, by sitting around and waiting for a strong hand, a player folds away small amounts of money when failing to make a pair on the flop. Even worse, when a player is lucky enough to make a reasonable

R

hand, such as middle pair, he or she may end up folding by the river when an opponent makes multiple bets, resulting in losing a medium-sized pot without even seeing the showdown.

Whenever players make decisions at the poker table, they should consider the mathematical proposition that’s offered. Consider not only the pot odds, but also the Minimum Defense Frequency, which is the percentage of time needed to either raise or call to avoid being exploitable by maniacal aggression.

For example, if the pot is $300 and an opponent bets $150, if that opponent wins the pot more than 33% of the time, his bluffs immediately profit. To figure out how often a total bluff needs to succeed, take the bluff amount and divide it by the bluff amount plus the size of the pot.

So in this case, it would be $150/ ($150+300) = 33%. In order not to be immediately exploitable, defend at least 67% of the time (100% 33%). That number is the Minimum Defense Frequency.

To figure out what 67% of a hand range looks like, spend time away from the poker table dissecting and analyzing the entire range. That’s the exact opposite of what many players do. Instead, they speculate about how to play a specific hand, such as Ace-King; or types of hands, like flush draws. Instead, look at the big picture, not the specific holding in this specific hand, and consider how to play each hand in the entire range in each situation.

If the idea of range analysis seems foreign, reviewing the quizzes and challenge questions on the pokercoaching.com site will bring players up to speed, enabling them to think about and play poker at a high level.

For the most part, as the flop, turn and river become less coordinated, players should defend with more holdings that are traditionally thought marginal or weak. Suppose someone raises from middle position and a player calls in the big blind.

The flop comes 8 3 2 and an opponent bets about 35% of the size of the pot. Don’t fold hands like K-9 or Q-J, even though they lose to all decent hands. King-high and Queenhigh are quite weak, but they occasionally improve to strong top pairs.

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When they don’t, a player may win unimproved if he or she gets to the showdown or decides to bluff on the river when the board gets scary. Also consider check-raising on the flop with hands that are not quite good enough to call with but still have some equity, such as T-9 and 6-4.

This will put an opponent in a tough spot with most of his or her marginal and weak holdings.

When facing a larger bet size, defend less often. For example, if the pot is $1,000 and an opponent makes a gigantic $3,000 bet, defend 25% of the time because his bluffs need to succeed 75% of the time, $3,000/($1,000+$3,000).

Against large bets, play snuggly because an opponent is risking a lot to win a little. That said, stick around with most of strong pairs and strong draws, assuming an opponent is known to use gigantic bets on a regular basis.

While it is vital to at least consider the Minimum Defense Frequency against strong players and overly aggressive players, some players in a specific game may play in an overly cautious manner. If a player knows from experience that opponents are cautious and bet only when they’re confident they are going to win the pot, then continue nowhere near

”Boston” Bob Mariano of Survivor (left) matches wits with Jonathan Little on CBS Sports Network’s Poker Night Live.

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the Minimum Defense Frequency.

If a player knows an opponent will bet the flop, turn and river with only three-of-a-kind or a better made hand and will rarely (or never) bluff, then fold almost everything.

When a player has a clear idea of the mistakes opponents are likely to make, that player should not be afraid to drastically deviate from a fundamentally sound strategy to take advantage of them. The way to win substantial money from poker is to play with opponents with less ability, and then adjust one’s default strategy to take advantage of the flaws in their strategy.

That said, many players win from poker simply due to their opponents folding too often. If all a player has to do to win is make a bet, poker is easy! When facing one of those overly aggressive players, instead of folding and playing directly into their strength, turn their aggression into their biggest weakness by calling down much more often than they expect, which results in catching their big bluffs and collecting their chips.

Jonathan Little, a professional poker player and World Poker Tour Player of the Year, has amassed more than $7 million in live tournament winnings and written 14 bestselling books. @JonathanLittle

To win substantial money from poker, play with opponents of lesser ability and then take advantage of the flaws in their strategy

Little offends by not folding 3 7

UP YOUR GAME How can an amateur player take poker to the next level — from entertainment to making money?

Spend some time studying. Understand hand ranges and how they interact with each other, as well as how to play a balanced strategy. From there, learn to adjust to take advantage of the mistakes opponents are making. These skills are taught in great detail at pokercoaching.com.

After mastering the fundamentals of poker, play as many hands as possible. Online cash games are a great tool for this. The game moves at a faster pace than live poker because there aren’t physical cards and chips and because players can play more than one table at a time.

Put a small amount of money, perhaps $50, into an online site. Play to gain experience, not to win the most money possible. If online poker isn’t an option, find a small stakes live cash game with a relatively low rake. Think about each and every decision, and work hard to play fundamentally well while also experimenting to see which plays take advantage of opponents’ mistakes.

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MARCH–APRIL

CALENDAR MARCH The Iditarod Trail Sled Dog Race Alaska Carnival Rio de Janeiro

Austin

New York St. Patrick’s Day Sun enters Aries. Full Moon in Libra. Hope springs eternal for the world He Said She Said San Diego

2 2–9 8–17 10–12 17 20 30–31

He Said She Said Las Vegas

APRIL FOMC Announcement at 2p.m.

10

OPTIONS SYMPOSIUM Denver, presented by NASDAQ & tastytrade

13

Markets Closed Good Friday. Full Moon in Libra. PEACE

19

He Said She Said Austin He Said She Said Houston

27–28

ASTRO OUTLOOK

T

he Fed’s March 20 announcement of interest rate decisions occurs on the most astrologically significant day of the month, which also has specific tie-ins to the Federal Reserve Board itself as well as 10-year T-note futures.

The spring equinox is always an important day to watch for a change in trend, and is one of 10 days annually so designated by legendary trader (and pioneer financial astrologer) W.D. Gann. (In 2018, the S&P 500 made its yearly high at the fall equinox.) This year, the spring equinox also features a full moon at 00 degrees of Libra, known as a “world point,” with significance for the entire planet. Thus, the news and activities surrounding March 20 carry added importance and weight that goes beyond just a single market or single announcement.

As for the markets, the March 20 planetary positions indicate a potential high in the 10-year Treasury note futures market, which suggests the Fed announcement that afternoon confirms that there is a low in interest rates and they are moving higher.

Jupiter is approaching an exact connection with the position of Neptune when the 10-year T-note contract began trading. The last time this occurred, in late 2007, marked the end of the economic expansion that began in November 2001, with recession officially declared to have begun in December 2007 (announced a year later, on Dec. 1, 2008, by the National Bureau of Economic Research).

The gold market first-trade horoscope chart also is highlighted by the March 20 full moon, which indicates a potential low in price.

Susan Abbott Gidel, the author of Trading In Sync With Commodities—Introducing Astrology To Your Financial Toolbox, also edits Red Letter Trading Days, a monthly newsletter.

He Said She Said Tom Sosnoff and the tastytrade personalities are hitting the road in 2019 with stories, games and general trader shenanigans. It’s your chance to meet your favorite tasty star and win some serious swag and prizes. visit events @ tastytrade

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techniques essential trading strategies BASIC

Interpreting Indices

By Frank Kaberna

M

any passive investors wrongly believe all stock indices are the same. That misconception discourages them from expending much effort when choosing a stock to buy. In fact, many investors are content with knowing that they are participating in the “stock market” without knowing which stocks they own.

Stock indices measure the performance of a specific market sector, nation or region by tracking the prices of a group of stocks pertinent to the given market. For example, the most commonly quoted stock indices in the United States include the S&P 500, Dow Jones Industrial Average, Nasdaq 100 and Russell 2000.

Most investment choices consist of exchange-traded funds (ETFs) that either directly or indirectly track one of those indices, which makes a familiarity with their attributes essential when deciding on an ETF to buy. index contents U.S. stock indices differ mainly in the names and quantities of the stocks they hold. Those distinctions cause them to trend in the same direction most of the time while exhibiting variable amounts of movement and risk.

The top holding in the S&P 500 is currently Apple (AAPL), whereas the stock that holds down the top spot in the Russell 2000 is Five Below (FIVE). As of 2015, more than 40% of smartphone users in the United

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Index capitalizations Russell has presented the greatest volatility of returns to investors. That’s expected from an index made up exclusively of small-market capitalization stocks because those companies are more volatile than their larger counterparts.

States employed the Apple iPhone (via statista.com). Five Below is not even one of the five largest public companies carrying the description “discount store” in the United States.

Sharing the moniker “stock market” does not necessarily denote shared holdings. While all 30 stocks in the Dow are also held in the S&P 500, not one of the Russell’s 2,000 stocks is shared by the S&P 500, Dow or Nasdaq 100.

That major discrepancy between the Russell and its three stock index peers is a function of its small-cap bias. Five Below, the Russell’s top holding, has a market capitaliza-tion around $6.5 billion. The stock with the smallest weighting in the

S&P 500, News Corp., has a market capitalization of approximately $7 billion. (See “Index capitalizations,” above.)

Though the S&P 500, Nasdaq and Dow have more in common with each other than they do with the small-cap Russell – all three indices show Apple in their Top 10 holdings – considerable differences in their sector components can influence their movement.

For example, the Nasdaq has a considerable bias to technology stocks, with approximately 50% of its stocks coming from that sector. Also, it’s the only major stock index that holds no financial stocks. The Dow is the only index with industrials taking the place of top sector exposure.

The top holding in the S&P 500 is currently Apple

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The S&P 500 and Nasdaq both weight their holdings by market capitalization; that is, larger companies receive larger percentages of the index’s exposure and thus have a greater influence on where the index moves. However, the Nasdaq has fewer stocks than the S&P 500, 104 versus 505, so it’s much top-heavier with big companies such as Apple and Amazon taking big weightings.

The Dow, on the other hand, is weighted by stock price, granting the greatest influence to the highest-priced stocks. That’s considered antiquated, which fits the oldest index in the United States. It was founded in 1885. Because of that formula, the Dow has a Top 5 holdings unlike any of the other major indices. volatility Choosing the right index is not as simple as picking the strongest bull of the bull markets. Stocks have presented a great return during the last decade, but those gains did not come without volatility. Once again, the degree of volatility varies across the indices.

The S&P 500 and Dow have long been considered the safest indices with their greater diversification among market sectors and larger market capitalizations. And that’s for good reason because for a given average annual return, those two indices fluctuate the least around that mean on a yearly basis.

Though the Nasdaq has been the outperformer of the group since 2010, it has outperformed with greater volatility and wider ranges throughout the year than the S&P 500 or Dow. Buying stock just before a down year in the market requires a larger percentage move the following year to get back to even. That phenomenon is exacerbated by a more volatile market. So, while the Nasdaq is the most attractive of the bunch from a percentage return perspective, poor timing on entry could result in needing to dig out of a bigger hole.

Finally, the Russell has presented the greatest volatility of returns to investors. That’s expected from an index made up exclusively of small-market capitalization stocks because those companies are more volatile than their larger counterparts. At 15.5%, the Russell’s annual standard deviation is almost 50% greater than that of the S&P 500.

That volatility has not been kind to the small-cap index in recent years, with the Russell showing the worst returns of the four indices. However, volatility can work both ways, which makes the Russell subject to both large drawdowns and large rallies.

(See “Index correlations,” below.) the choice The S&P 500 ETF SPY, the mosttraded of the major indices, is now considered the best benchmark for the U.S. economy. It presents upside that depends mostly on the technology sector, similar to Nasdaq, but it also has a more diversified outlook that presents less volatility. The S&P 500 gathers the best of both worlds with the large-cap stocks of the Dow and smaller companies that are nearly eligible to be held in the Russell.

Buying shares of the Dow Jones

Industrial Average ETF DIA presents the least volatile option, and it has not experienced the greatest upside in the last few years. DIA is a great choice for those looking to get stock exposure with a considerably smaller threat of large drawdowns.

The Nasdaq 100 represents the best alternative for trend followers. Technology has been the stock sector du jour recently, and that might continue for years to come.

Those looking for a slightly diversified market that will mostly live or die by tech stocks should look no further than QQQ. The Russell 2000 ETF IWM is the epitome of high risk, high reward when it comes to choosing a stock index. Made up of companies all under $10 billion in market capitalization, that market is capable of steep returns in either direction. Its relative underperformance in recent years could translate into greater gains in the future if it plays catch up with the Nasdaq, or smaller losses if stocks turn over into a bear market.

Frank Kaberna, a former professional trader, is an online personality for tastytrade.com, where he focuses on advanced futures and options strategies.

The Russell 2000 ETF IWM is the epitome of high risk, high reward when it comes to choosing a stock index

Index correlations The major discrepancy between the Russell and its three stock index peers is a function of its small-cap bias.

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techniques

INTERMEDIATE

Covered calls

By Frank Kaberna

S

tocks tend to rise on about 55% of days, which gives buyers a statistical edge. But poor timing and short-term volatility can spoil profits even with that broad, historical statistic working in the favor of stockholders. Luckily, that’s not the highest probability strategy investors have at their disposal.

Buy and hold investors who are wary of turbulence in their portfolio can take advantage of stock options.

They can append call and put options to stock positions in ways that transform probabilities of profit and risk.

The most popular such strategy is the covered call.

The covered call pairs the sale of a call option with long stock to create a bullish position that has traded some of its upside potential for a greater probability of success and protection to the downside.

This low-maintenance extra step in the direction of active investing can make the difference between profits and losses in a portfolio. It also reduces volatility, thus alleviating at least some of the potential headaches of buying stock (see “Do your research,” right).

Executing the covered call starts with the simple purchase of stock and concludes with the less straightforward sale of a call option on that stock. This is done at a ratio of 100 shares of stock for every call option because options contracts maintain 100 shares of exposure per contract.

After finding an underlying market, investors should choose an expiration for the sale of the call. The stock portion of that strategy will live on into perpetuity, barring a buyout or bankruptcy, but the call is not so easy to hold. Most investors default to the expiration closest to a month

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in the future because it is usually the most liquid market and holds some of the greatest premium relative to time. However, investors can adjust that to suit how active they are because they have to buy back the call and resell it in the days before expiration (known as “rolling”). Investors with less time to trade might opt to sell their calls in expirations with several months left.

Once an investor chooses an expiration, the final and most hands-on step in a covered call’s execution is choosing the strike price. The most popular option is selling out-of-themoney calls, which benefits investors in two ways – the stock price moving higher and the credit received from the sale of the call.

This option, however, grants the covered call the lowest probability of profit. Going to the at-the-money strike offers the most even mix of potential profit and protection. In theory, the expected profit is simply

the credit received from selling the call, as there is no upside potential.

The last option – selling an in-themoney call – is the least popular alternative. Though this strategy has the highest probability of profit, investors rarely use it because of its relatively small reward.

S&P 500 ETF Covered calls present a high probability option for investing in the stock market relative to the simpler long stock position. However, this higher probability comes at the expense of the theoretically infinite upside of buying stock alone. But how much of a bump does the investor get in probability of profit and risk reduction from the short call? How much do they give up for this luxury?

Using the S&P 500 ExchangeTraded Fund (ETF), the SPY, as a benchmark underlying market, the at-the-money covered call has underperformed the long stock strategy by

Investors who are wary of turbulence can turn to stock options

Do your research The covered call pairs the sale of a call option with long stock to create a bullish position that has traded some of its upside potential for a greater probability of success and protection to the downside.

Covered Call Type

Probability of Profit (approx.)

Risk-Reward Relationship

Stock higher

Out of the money

55%-65%

Large profit potential with small downside protection

Stock sideways or slightly higher

At the money

65%-70%

Medium profit potential with medium downside protection

Stock lower

In the money

70%-80%

Small profit potential with large downside protection

Assumption

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At a glance Once an investor chooses an expiration, the final and most hands-on step in a covered call’s execution is choosing the strike price. The most popular option is selling out-of-the-money calls, which afford an investor profits in two ways – the stock price moving higher and the credit received from the sale of the call.

Long stock

At-the-money covered call

Out-the-money covered call

In-the-money covered call

a little over 3% annually. However, the addition of the call dropped the annual standard deviation – a measure of portfolio volatility – by more than 4%, while also reducing the worst-case scenarios.

This study was performed during a bullish period in the S&P 500, which almost guarantees that the naked long stock trade would outperform the covered call strategies. Yet, that’s not a valid assumption for future movement.

Covered calls not only reduce the volatility of a long stock portfolio in all environments, but also outperform buying stock alone in sideways and down markets. In fact, covered

calls are bullish positions that can profit even if stocks are down in a given timeframe. At-the-money covered calls profited 25% of months when the S&P 500 was negative in that same month.

Naked shares of stock have greater upside potential, but those greater returns on especially bullish months come at the expense of better returns for slightly bullish or slightly bearish months (see “Using S&P 500 ETF as a guide,” page 60).

In fact, the median return of the covered call strategy using out-of-themoney calls was higher than the stock alone. Also, the at-the-money covered call strategy was so good at mitigat-

ing losses that its positive returns extended all the way to 70% of the monthly data points compared to just 60% in the case of the stock position.

Moving the short call out of the money pays the investor both for movement higher in the stock and from the natural decay of the call price. How far the call is moved out of the money is up to the trader. Knowing that the S&P 500 has returned less than +2% in more than 60% of past months makes the call strike that is 2% away from the stock price a solid choice. This setup still ensures a decent downside protection, while profiting from a realistic gain in the stock.

In sideways and down markets, covered calls outperform buying stock alone

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techniques

cover your call One might think a call greater than 5% above the S&P 500 price is a better choice since 90% of S&P monthly returns reside below +4.6%, but call credits can be so small that they offer little to no downside protection that far away.

The degree of bullishness of the covered call – out-of-the-money being the most bullish and in-themoney being the least bullish – will dictate returns and volatility. In-themoney covered calls often show the smallest volatility of returns to go with the smallest average returns.

Out-of-the-money covered calls exhibit a volatility and return similar to that of naked stock, and at-themoney covered calls are between the two. The simple addition of a short call to a long stock position reduces portfolio volatility, while also outperforming the naked stock position a significant portion of the time. The main decision involved in implementing the covered call resides on which strike to choose, which is a function of an investor’s risk tolerance and bullishness.

Those who think stocks have some upside potential in the short term should buy the S&P 500 ETF and simultaneously sell calls around 2% above the stock price. While investors with a less optimistic view of the market can buy shares of SPY and reduce the bullishness of the strategy by selling calls closest to the stock price.

Selling the at-the-money call might be a more prudent decision given the recent bullish movement in stocks.

With the S&P 500 up 8% in just the month of January, the market could move sideways or give back some of those gains in upcoming trade. Also, bullish movement in stocks can reduce the amount of premium in their options markets making the out-ofthe-money calls less attractive due to their reduced credit. The aggressive ATM covered call solves for both the potential of less bullish movement and smaller call premiums.

Check your options Covered calls present a high probability option for investing in the stock market relative to the simpler long stock position. However, this higher probability comes at the expense of the theoretically infinite upside of buying stock alone.

Long 100 Shares of SPY No Call

Short ATM Call

Short OTM Call

Success Rate

65%

71%

68%

Average Monthly Return

+0.7%

+0.4%

+0.6%

Standard Deviation of Monthly Return

+/-4.2%

+/-3.0%

+/-3.5%

Using S&P 500 ETF as a guide Using the S&P 500 ETF (SPY) as a benchmark underlying market, the at-the-money covered call has underperformed the long stock strategy by a little more than 3% annually. (Data since 2004.)

Deciles of Monthly Returns of Long SPY No Call

Short ATM Call

Short OTM Call

Maximum

+23.6%

+17.8%

+20.7%

90th Percentile

+4.6%

+2.8%

+3.6%

80th Percentile

+3.5%

+2.0%

+2.7%

70th Percentile

+2.6%

+1.6%

+2.3%

60th Percentile

+1.9%

+1.3%

+1.8%

50th Percentile (Median)

+1.2%

+1.0%

+1.3%

40th Percentile

+0.5%

+0.6%

+0.7%

30th Percentile

-0.6%

+0.1%

-0.2%

20th Percentile

-1.9%

-0.8%

-1.5%

10th Percentile

-4.2%

-2.7%

-3.4%

Minimum

-29.4%

-25.2%

-26.2%

In-the-money covered calls often show the least volatility and smallest average returns

Frank Kaberna, a former professional trader, is an online personality for tastytrade.com where he focuses on advanced futures and options strategies.

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techniques

ADVANCED

Covered Strangles

By Anton Kulikov

A short strangle is a neutral strategy that profits when the stock stays between the short strikes as time passes, as well as whether there are any decreases in implied volatility. The short strangle is an undefined risk option strategy.

Directional Assumption: Neutral Setup: Sell OTM Call Sell OTM Put Ideal Implied Volatility Environment: High Max Profit: Credit received from opening trade How to Calculate Breakeven(s): Downside: Subtract total credit from short put Upside: Add total credit to short call With strangles, remember that there’s truly undefined risk in selling a naked call. Focus on probabilities at trade entry, and keep the risk/reward relationship at a reasonable level.

Implied volatility (IV) plays a huge role in the strike selection with strangles. The higher the IV, the wider the strangle can be while still collecting similar credit to a strangle with closer strikes that is sold in a lower IV environment. To keep the strikes closer to the stock price, a higher IV environment yields a larger credit, as IV is essentially a reflection of the option prices.

The target timeframe for selling strangles is around 45 days to expiration. That balances shorter and longer timeframes.

Source: LEARN CENTER at tastytrade

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F

or most buy-and-hold investors, a selloff in the market acts like a double-edged sword, meaning that portfolios lose value but a nice buying opportunity arises. With the strategy known as the covered strangle, investors collect two to three times the premium of a covered call strategy, while having the opportunity to accumulate shares of a stock at lower prices.

A covered strangle is simply taking a covered call – long stock plus a short call – and adding an out-of-the-money short put. Broken down, it looks like the example on the right.

So where’s the risk? Ideally, investors use this strategy for a stock they like and want to acquire.

The risk is in having the stock called away if the short call gets breached or being put more stock if the short put gets breached.

But remember, investors are going to be short out-of-the-money calls and puts, meaning that if the stock gets called away, they are going to profit on both the stock and the put they’ll be able to buy back at a better price. If the stock price goes down and the investor ends up getting put more stock, the investor will reduce the cost basis by buying the stock at a lower price than the initial position and, as a bonus, the now-worthless short call will buffer some of the losses because the stock price is going down.

Finally, the best part of the covered strangle is if the stock does nothing. The investor still profits because the short call and short put expire worthless. Then the investor collects two to three times more premium than if they had just a covered call. That’s because out-of-the-money put trades, on average, are twice as expensive as calls of the same delta value in equity products like SPY, QQQ, DIA and IWM. So to enhance a stock position that one likes, look to the often-overlooked but versatile covered strangle. Investors begin with the same exposure as a long stock, and they have protection if the stock moves on both sides. And if the stock does nothing, the investor is rewarded with significantly more premium than with a standard covered call.

Breakdown of a covered strangle With the covered strangle, investors collect two to three times the premium of a covered call, while also getting the opportunity to buy shares of a stock at lower prices.

Long 100 shares

Covered call

Covered strangle

Anton Kulikov is a trader, data scientist and research analyst at tastytrade.

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luckbox of the month

ZUCKERBERG’S STILL LUCKY — FOR NOW T

FB

a (dis)loyal mentor It’s also true that Zuckerberg’s selfdescribed mentor, Silicon Valley investor Roger McNamee, has accused Facebook of negligence.

McNamee faults Zuckerberg’s

64

company for failing to stop bad actors from using the social media network to spread disinformation about the 2016 U.S. presidential election and the BREXIT referendum. Yet, McNamee apparently still feels good enough about his protégé to continue calling him “Zuck.” What’s more, a survey of Facebook employees indicates they want Zuckerberg to remain CEO. Facebook’s 2016 election fiasco included the Cambridge Analytica data breach. That particular snafu delivered the personal information of 87 million Facebook users into the clutches of evildoers who used it to feed falsehoods to voters. But a majority of Facebook employees told researchers they didn’t think such problems reduced the company’s stature.

Then allegations arose that 50% of Facebook’s two billion accounts were fake, meaning that the social media giant is taking advertisers for a ride. They’re allegedly paying for clicks they’re not getting. “Facebook has been lying to the public about the scale of its problem with fake accounts, which likely exceed 50% of its network,” said Aaron Greenspan, a former classmate of Zuckerberg’s at Harvard.

Greenspan wrote a 70-page report on the matter called Reality Check and posted it on the PlainSite website. The immediate reaction?

The markets shrugged off the news as yet another boring scandal and

the stock rallied.

Next, accusations were leveled in a class action lawsuit that Facebook encouraged game developers to allow children to spend money online without their parents’ permission. It cost families hundreds or even thousands of dollars. Was this act of “friendly fraud” enough to bring Zuckerberg down? Had his luck finally run out?

Not likely. Zuckerberg isn’t exiting the company unless it’s by choice.

His luck can hold because he owns enough shares to fend off any attempt to oust him. That’s lucky.

Zuckerberg’s had a wild ride lately, much of it his own fault. But he’s still rich and still powerful.

That’s why he’s lucky enough to get the nod as luckbox of the month. luckbox for life?

In the end, however, Zuckerberg’s seemingly endless supply of luck may run out. In other words, he may not remain a luckbox all his life. He doesn’t deserve all his billions, and he’s unfit to lead a publicly traded corporation. Time and again he has shown himself unworthy of the public’s trust.

ZUCK’S TEXTS TO HARVARD CLASSMATES zberg02: Yeah so if you ever need info about anyone at Harvard zberg02: Just ask. zberg02: I have over 4,000 emails, pictures, addresses SNS [unknown]: What?

How’d you manage that one? zberg02: People just submitted it. zberg02: I don’t know why. zberg02: They “trust me” zberg02: Dumb fucks.

Source: PlainSite (1.24.19)

PHOTOGRAPH: REUTERS/CHARLES PLATIAU

o the casual observer, the past year probably looked disastrous for Facebook (FB) CEO Mark Zuckerberg. Yet, despite all the drama, Zuckerberg’s actually been quite lucky. He’s been fortunate enough, in fact, to earn the sobriquet of luckbox of the month.

Sure, Zuckerberg’s net worth has declined of late, but it declined from a high of $55 billion. In a Forbes magazine list of the 10 richest people, the 34-year-old tycoon is the only one under 50. Besides, he became the world’s youngest self-made billionaire at age 23, and no one seems likely to break that record anytime soon.

What’s more, Zuckerberg usually walks away unscathed when he raises someone’s hackles. At least one U.S. Senator expressed his ire when Zuckerberg broke his promise to stop sharing Facebook users’ private thoughts with the highest bidder. But Congress didn’t really do anything about it. And where’s the sting in drawing criticism from a member of a body that has a 75% disapproval rating? Congressional unpopularity seems like a stroke of luck for Zuckerberg.

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