November 2019

life. money. probability.

NOVEMBER 2019

BETTING ON

The Future Futurist Forecasts and Warnings Political Prediction Markets The Future of Futures Trading

A Trader’s Trip to Burning Man

Tales from the Trading Floor

Psychic Follies

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november 2019

THE ISSUE WITH

THE FUTURE THE FUTURE

14 Futurism’s Fat Tails 16 A Future Without Free Will 18 Picture Tomorrow 20 Facing Intel Inequality 22 50 Years to Run for Cover

This book of cartoons delivers “techno-realism.”

P. 18

THE FUTURE OF FUTURES TRADING

25 Bringing Futures Forward & Tales from the Past 32 Something Small Is About to Happen 33 Why Millennials Should Love Futures 34 Smaller Futures Contracts Put ETFs in the Crosshairs 36 Politics Has a Futures Market

november 2019 | luckbox

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editor-in-chief ed mckinley managing editor yesenia duran technical editor mike rechenthin features editor tom preston contributing editor vonetta logan editorial assistant mike reddy A former floor trader photographs Burning Man.

P. 39

creative director jacqueline cantu contributing photographer garrett roodbergen editorial director jeff joseph

trends

trades

tactics

life, luxury & the pursuit of happiness

actionable trading ideas

essential trading strategies

FESTIVALS

BASIC

39 Pictures from Burning Man

50 Worst-Case Scenarios Call for Covered Calls

ARTS & MEDIA

42 Book & Podcast Reviews

CHEAT SHEET

51 11 Trades for 6 Outlooks

POKER

45 Psychic Poker Play

60 Making the Leap to Futures INTERMEDIATE

61 Sizing Up Futures Contracts ADVANCED

THE TECHNICIAN

MACRO VIEW

DO DILIGENCE

52 Forecasting Price Patterns

comments & critiques feedback@luckboxmagazine.com

62 Taking Futures to a New Level

On the cover: Illustration by Lou Patrick Mackay

request contributor’s guidelines, submit press releases & editorial inquiries editor@luckboxmagazine.com advertising inquiries advertise@luckboxmagazine.com subscriptions & service support@luckboxmagazine.com media & business inquiries publisher: jeff joseph jj@luckboxmagazine.com

THE NORMAL DEVIATE

46 Volatility: Trading’s Best Crystal Ball TRADER

48 Meet Pete Mulmat CALENDAR

49 Two Trend Changes

luckbox magazine, a tastytrade publication, is published at 19 n. sangamon, chicago, IL. 60607. editorial offices: 855.468.2789

57 5 Tips for Choppy Markets 58 What’s Really Going on Inside That Mutual Fund?

FAKE FINANCIAL NEWS

printed at Lane Press

10 Future Shtick

www.luckboxmagazine.com

@luckboxmag

LUCKBOX OF THE MONTH

64 WeWork’s Winning Duo

luckbox magazine

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. And finally, active investing is not easy, so please be careful out there!

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PHOTOGRAPH: ALAN MATTHEW

CHERRY PICKS

submit a story idea tips@luckboxmagazine.com

luckbox | november 2019

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THE ISSUE WITH THE FUTURE Give me back the Berlin wall Give me Stalin and St. Paul I’ve seen the future, brother It is murder Things are going to slide, slide in all directions Won’t be nothing, nothing you can measure anymore The blizzard, the blizzard of the world Has crossed the threshold And it has overturned the order of the soul —The Future, Leonard Cohen (1992) Twenty years ago, dot-com mania gripped the nation.

The Mosaic web browser had ignited the madness in 1993 by transforming computers from a rich man’s toy into everyman’s household necessity. Suddenly, the Information Technology Age had dawned.

The irrational exuberance intensified in 1995 with Netscape’s $2.9 billion IPO. A rash of subsequent IPOs followed at Yahoo, Lycos and Excite. Investors were frantically buying stock in any company with “.com” appended to its name.

Between 1995 and 2000, the Nasdaq Composite stock market index rose 400%, and its price-earnings ratio reached 200.

Qualcomm shares skyrocketed more than 2,600% in 1999. Valuations no longer mattered as analysts and CNBC’s cheerleading commentators urged the public to buy because the boom was “different this time.”

Investors became convinced that nothing could slow the advance of technology. Stock

thinking inside the luckbox luckbox is dedicated to helping hardworking, active investors achieve skill-derived, outlier results. How?

6

prices could rise forever. Market corrections would become a thing of the past. The time had come to throw off the chains of reason, forget the crash of 1987 and embrace a boundless future. Anything seemed possible.

Against that tumultuous backdrop, tech IPO-focused Red Herring magazine published an article in its April 1999 issue on a revolutionary internet technology company and its proprietary TIDE communications protocol, which was short for “Telepathic Internet Data Exchange.”

The technology granted users the seemingly magical ability to compose and send email messages telepathically. No more typing. Just dream up the words of the message—and think send.

The article captured the imagination of an untold number of readers. But the catch was that it was a journalistic April Fools’ Day hoax. It was nothing more than an early version of fake news served up to gullible investors all too eager to willingly suspend their disbelief.

Red Herring was inundated with letters from frantic would-be investors who couldn’t track down the promising new miracle startup. The magazine published a clarification in the subsequent issue, owning up to the ruse.

Red Herring went into decline with the dot-com crash and ceased print publication in 2003. But there was a prescience about the prank that suggests the mag had an eye to the future.

In 2013, scientists at the University of Washington demonstrated the possibility of

1 tune out the

noise and false prophets in the investment world and take control

2 probability is the

key to improving outcomes in the markets and in life

luckbox | november 2019

3 timely investment

themes, sectors and stocks matter only because they tend to produce greater volatility

4 greater volatility brings greater opportunity

brain-to-brain connection. More recently, researchers successfully sent a person’s thoughts through a computer to control the hand motion of someone a mile away.

Facebook CEO Mark Zuckerburg has taken notice. In late September, the social media company acquired mindcontrol interface startup CTRL-Labs for an undisclosed, high nine-figure sum—its largest investment in five years. CTRL-Labs is developing neural ways of interacting with technology without traditional mouse-andkeyboard setups, touchscreens or any other form of physical controller.

Yesterday’s futuristic hoax becomes today’s astonishing innovation and tomorrow’s humdrum, everyday fact of life.That’s why the editors of luckbox have sought the perspectives of the world’s great futurists for this Issue with the Future.

Some of their forecasts may seem fantastic, but make no mistake, the future is approaching with breakneck speed. It’s becoming inreasingly difficult to separate today’s fantasy from tomorrow’s fact.

Jeff Joseph editorial director

5 options are the

best vehicle to manage risk and exploit market volatility

6 don’t rely on

luck—learn the options—luck smiles upon the prepared

Ed McKinley editor-in-chief

two ways to send comments, criticism and suggestions to luckbox Email feedback@luckboxmagazine.com Visit luckboxmagazine.com/survey

Open Outcry luckbox surveys readers to learn their thoughts on the current issue and the themes of the upcoming issue. It makes for rewarding interactions and, invariably, the readers have a lot to say.

In the most recent survey, readers reacted to the September Big Tech Catastrophe issue.

They also rated the themes in this issue that they believe will have the greatest impact in the next 10 years, based on a scale of five for the most influence and one for the least. Check out the ratings results below—and take a look at the reader comments that follow.

4.3 4.2 4.2 3.4 3.2 3.2 3.2 3.0

Artificial intelligence Robotics and automation Surveillance and privacy Virtual reality and augmented reality Climate change Self-driving cars 3D printing Space exploration and travel

Artificial intelligence will continue to be a game changer. Processes based on machine learning and deep learning will speed our development exponentially. Robotics will penetrate every aspect of our lives, and our perception regarding them won’t be that they are machines, but are instead somewhere on the spectrum between humans and machines. Hopefully, human emotions won’t wither away because of our continuous and growing dependence on machines.

Thanks for luckbox. It’s a great magazine.

Indeed, one of my favorites.

—Yossi Ashkenazi, Israel I am curious about how long it will take until we have the first serious terrorist or criminal attack on the digital world. This is the new, real danger, given society’s dependence on software, technology and the internet. luckbox is absolutely great. I love that it covers many topics, not only trading-related ones. Very interesting. Thanks a lot!

—Otto Zatschek, Austria

We the people will live in a more technologically advanced environment.

Therefore, we will be able to recycle most of our resources, outsource the hard work to machines, produce less pollution, and live healthier and more comfortable lives.

Those who are greedy and ignorant will be destroyed in bubbles of any kind.

—Viktor Striezenec, Nitra, Slovakia The principle of individual sovereignty is all but dead and probably won’t make it past the 2020 election—regardless of who wins. The tolerant and intelligent tend to grow complacent in rich and technologically advanced societies. In years to come, as a dwindling minority, they will no doubt “yell loud and do little,” as they watch whatever liberty they have left legislated away “for the greater good.” Some will fight, but I doubt it will be enough.

So there’s the future if the bright don’t get organized and do something effective to change it. Unfortunately, a deep, wide look at history and the collapse of societies large and small tells us we are headed right down the middle of the standard deviation.

—Gary Graham, Los Angeles The race to the future in artificial intelligence, self-driving cars, robotics, 5G and biotech between the United States and China will decide how future technology is distributed across the global population.

I understand the concern about the big tech firms in the U.S.—such as Facebook, Amazon and Google—but those concerns

seem minimal compared to how life would play out should that same tech and others be influenced by the Professional Regulation Commission and the Chinese Communist Party. From that perspective, the simple but worrisome issues of the loss of privacy pale even as the United States flips to a reality of full surveillance.

Imagine if China beats us to the best of the tech future; what would our privacy and personal autonomy be like then? If that’s a little hard to imagine, move the dial to the events playing out in Hong Kong and grab an umbrella. So yes, I am concerned about the loss of privacy we face because of the negligence of some U.S. tech firms.

But I am much more concerned with the global decline of personal autonomy that would occur should the control of major innovations in technology shift from the U.S. to operations in China, such as Huawei and Tencent.

— John Fehringer, Seattle luckbox is enjoyable. Keep it up!

Google, Facebook and Amazon are rat bastards! I stay away from them all.

I’d like to learn more about trading futures.

—Mark Binette, Mesa, AZ Mark, this edition of luckbox includes a history of futures markets, a primer on futures trading tactics and an assessment of the trend toward smaller futures contracts. Enjoy!

november 2019 | luckbox

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SHORT INTEREST

THE FUTURE

“Without jobs, the future will come to resemble either the cultivated benevolence of Star Trek or the desperate scramble for resources of Mad Max.” —Andrew Yang is staking his presidential campaign on job creation and a $1,000 monthly stipend for every U.S. adult.

“I think we should really do our very best to become a multi-planet species, and we should extend consciousness beyond Earth, and we should do it now.”

—Elon Musk

“You may keep your secrets from your friends, from your parents, your children, your doctor, even your personal trainer. But it takes real effort to conceal your thoughts from Google. Digital authoritarianism is not, alas, the stuff of dystopian fantasy, but of an emerging reality.”

—Boris Johnson, the brash populist prime minisiter of the U.K., has been a leading advocate of leaving the European Union.

“If mankind’s so-called technological progress were to become an enemy of the common good, this would lead to an unfortunate regression to a form of barbarism dictated by the law of the strongest.”

—Pope Francis

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“Artificial intelligence will reach human levels by around 2029. I have set the date 2045 for the ‘Singularity,’ which is when we will multiply our effective intelligence a billionfold by merging with the intelligence we have created.”

“In the City of God there will be a great thunder, Two brothers torn apart by Chaos, while the fortress endures, the great leader will succumb, The third big war will begin when the big city is burning.”

—Nostradamus published a book of prophecies in 1555 that has rarely been out of print.

—Ray Kurzweil, inventor and futurist, has been called “Edison’s rightful heir.”

“Everything that civilization has to offer is a product of human intelligence; we cannot predict what we might achieve when this intelligence is magnified by the tools that AI may provide, but the eradication of war, disease and poverty would be high on anyone’s list. Success in creating AI would be the biggest event in human history.

Unfortunately, it might also be the last.”

—Stephen Hawking

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Future Shtick

Psychic, or psyched out? My visit to a fortune teller By Vonetta Logan

Tarot cards are believed to have originated in Italy during the late 14th or early 15th century, but they weren’t popularly associated with the occult until the late 18th century.

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hen luckbox asked me to visit a psychic for this future-focused issue, I felt “shook.” I grew up in the days of Miss Cleo’s “call me now” television infomercials and the hit show “Crossing Over with John Edwards” (the medium, not the baby mama drama politician). Still, keeping the proposed article in perspective posed no problems—no need to mistake entertainment for reality.

But a sizeable portion of the American public takes the occult seriously.

A survey on yougov.com states that one in five (22%) U.S. adults have consulted a psychic or medium. And a recent Pew Research Center survey revealed that roughly four in 10 adults believe some people can see the future. Not surprisingly, luckbox readers are a bit more skeptical (see opposite page).

Pew also tells us that women are twice as likely as men to visit a psychic. Chicks hustling to psychics over the sheer volume of emotionally constipated men means big business. The market for psychic services in the United States is estimated at $2.2 billion.

Psychic services are categorized as astrology, palmistry, tarot cards, medium services and aura reading—and it’s a growing industry.

So being a newb to the whole woo-woo psychic thing, I went straight to Yelp and searched for “top psychics in Chicago.” The No. 1 psychic had a two-year wait list. The No. 2 psychic in town, a woman named Dorothy, runs a storefront called Spiritual Gallery.

I called to set up an appointment and made it clear I needed a reading for an article. I don’t want that bad ju-ju of lying to a psychic.

The storefront, located in Chicago’s bougie Lincoln Park neighborhood, has neon signs in the window advertising chakra alignment, tarot card reading and other spiritual services. Soothing music greets patrons as they enter, and display racks feature candles, healing stones and enough crystals to arrange for your next Instagram post. Dorothy herself is straight from psychic central casting.

Exotic tilted eyes, raven black hair and artfully placed jewelry make her seem like someone with the psychic chops to lead customers on a spiritual journey. She claimed Armenian heritage and said she has known of her gift “since birth.”

Dorothy’s psychic abilities focus only outward, meaning she can read other people but doesn’t receive flashes of insight into her own life. She didn’t know my name, so there’s no way she Googled me before the appointment.

She had me sit on one side of a long wooden table while she sat on the other side. As the soothing sounds of Enya Goes to Whole Foods droned in the background, she asked me to shuffle a wellworn deck of tarot cards. She

PHOTOGRAPH: GARRETT ROODBERGEN

FAKE FINANCIAL NEWS

luckbox | november 2019

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PHOTOGRAPHS: (READING) GARRETT ROODBERGEN; (CARD) SHUTTERSTOCK

then arranged the cards in a past, present and future layout. She asked for my name, date of birth and place of birth.

I came into the reading with an open mind. Sure, good psychics are part social scientist, part therapist and part healer, but are they seeing things or just guessing?

Dorothy started with a generic, but not incorrect statement about me. “You’re very strong-minded.”

Um, what woman isn’t? “You’re a very creative person.” I had already told her I was a writer. “Your love life has not been easy.” WHOOO CHILD. But again, I’m a middleaged woman not wearing a wedding ring. I’m covered in cat hair, and a Hot Pockets wrapper is stuck to my purse. It’s not rocket science to discern that I suck at love.

But then it got a little goosebumpy when she said, “You have a hard time asking for help.”

She pointed to one of the cards lying face up: The Hermit. “You’re very closed off in public.” She said I needed to get more comfortable in my own skin and use the laws of attraction to bring more balance into my life. Generic? Possibly, but it was spooky the way her piercing eyes stared through me as she read the cards and read me. I’m a proud, flag-waving introvert, and it’s not unusual for me not to leave my house on some weekends to recharge.

But in happy news, she said that even though “I have balance in all aspects of my life except for love,” (womp womp) I haven’t met my twin flame. She sees me meeting a Leo (the astrological sign, not the perpetual bachelor of Titanic fame) who will sweep me off my feet and move me out to the ’burbs.

Our meeting will be organic (we will meet while I’m traveling) and I need to stop shutting down good things before they happen.

Then she abruptly pivots, eyes going wide, telling me to stay away from water. I’m like, “What?” She says water is very spiritual for me, but I must stay away from large bodies of water. She says I can

Dorothy, with tarot cards laid out, gives Vonetta her psychic reading.

go on it, hello fancy yachts, and around it, hello lake cottage, but I must not go in it. Good psychic reading or “black people can’t swim” tomfoolery? I can swim, but I’m not the strongest of swimmers, so message received, psychic lady!

Toward the end of the reading, Dorothy said something correct but esoteric. She pointed to the Wheel of Fortune card that was pointing right side up (direction matters in tarot) and said, “You’re too worried about your retirement. You need to stop obsessing over it.” Literally, just the week before I had moved an old IRA over to tastyworks brokerage, increased my 401(k) contributions and started researching high-yield savings accounts. I shared that I, like a lot of women, was worried that because I’m single I won’t have enough saved to support myself in retirement. “You don’t need to worry about that,” she said. “You will find love, and he will be very successful.” Can I get an ETA on that? Does your universe-matching plan have a contribution-matching plan?

At no point did she try to upsell me a chakra alignment or a magical love crystal. Because people often seek out psychics at the most vulnerable times in their lives, the industry can be a hotbed of fraud. People have

been scammed out of millions of dollars to “reverse curses” or “to find love again.” More than 94,000 registered psychic businesses operate in the United States, and they can’t all be gems. I did ask how often she recommends her clients visit her, and she said, “About every six months.” My reading was $75, and luckbox paid for it.

Dorothy asked if I was happy with my reading. I’m not going to lie—hearing that you’re not going to die alone and that your chihuahua isn’t going to eat half your face out of hunger is reassuring! What would you do if you knew you couldn’t fail? Or who would you love if you knew they would love you back? What job would you take if you knew you would succeed?

No matter what, we can all benefit from taking in as many outside perspectives as possible, keeping an open mind and being more positive.

I’m going to let destiny play itself out, but if you’re a single Leo, call me. We just can’t go swimming on our first date.

Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan

“More than 94,000 registered psychic businesses operate in the United States, and they can’t all be gems.”

41% of U.S. adults believe in psychics Pew Research Center

Can psychics foresee the future?

Yes 13% Maybe 20% luckbox Reader Survey

november 2019 | luckbox

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THE FUTURE Illustrations for this section appear in the book Cartoons from Tomorrow.

(See p. 18)

In this luckbox special section, futurists offer some alarming takes on what lies ahead for America and the world.

Their predictions cover a wide range of trends and disciplines, but they tend to agree on one idea: Adjusting to tomorrow’s momentous changes won’t be easy.

IN THIS SECTION: 14 Futurism’s Fat Tails 16 A Future Without Free Will 18 Picture Tomorrow 20 Facing Intel Inequality 22 50 Years to Run for Cover

november 2019 | luckbox

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THE FUTURE

Futurism’s Fat Tails Confronting the grim but reasonable probability that humankind has only a limited future

By Ed McKinley

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Futurism has a past. In the 1500s, French “seer” Nostradamus consulted the Bible and studied astrology to predict fires, floods, famines and battles. Believers insist his writings—which were vague enough for nearly any interpretation—foretold Hitler, Hiroshima and the Apollo space program. About the same time, Italian artist Leonardo da Vinci was sketching fanciful flying machines that included a precursor to the helicopter.

But it wasn’t until 1842 that the word “futurism” appeared in the dictionary, referring at first to Biblical predictions. In 1909, an Italian artistic, literary and political movement christened itself “futurism.” By the mid-1940s, before the proliferation of fat tails in finance, academics were using the word “futurism” to describe a new science of probability.

In the early 1960s, “futurism” began to take on its present-day meaning in the books Inventing the Future and The Art of Conjecture.

In 1970, husband and wife Alvin and Heidi Toffler published Future Shock, warning of the rapid pace of change. Ray Kurzweil wrote The Age of Spiritual Machines in 1999 and published The Singularity Is Near in 2005, alerting readers to a supposedly immanent takeover by intelligent machines.

Along the way, countless prophesies fell flat. Americans of a certain age are still waiting for flying cars and wondering when atomic energy will finally make electricity too cheap to meter. They still don’t have robot butlers or machines that spit out precooked meals. Star Trek’s Federation of Planets and Starfleet Acad-

emy seem as far off today as they did in 1966.

But a lot of predictions have a reasonable chance of coming true.

For examples of plausible prognostics, check out the articles in this special section. Prominent futurists led by Yuval Noah Harari make some stirring predictions. A batch of cartoons set in the future makes some relevant statements, too.

But those takes on what lies ahead ignore the possibility that futurism has no future.

Predictions become meaningless if the march of technology comes to a screeching halt, a calamity that appears all too likely if climate change, hostile artificial intelligence or just plain bad luck brings humankind to the brink of extinction.

Look first at climate change.

Some Americans grew tired of Al Gore’s preachy but timely screeds about failing crops, expanding deserts and potable water shortages.

He even warned that climate change could shut down the flow of warm water in the Gulf Stream, thus triggering a new European ice age. But

da Vinci’s flying machine

PHOTOGRAPH: WIKIMEDIA COMMONS

Author and mathematician Nicholas Taleb popularized the phrase “fat tail” in his seminal book The Black Swan. When a bell curve has a fat tail, there’s a greater likelihood of having a difficult-to-predict event like 1987’s Black Monday, the burst of the dot-com bubble or the Great Recession 2008.

The luckbox staff especially likes the more alliterative definition of fat tail—“an abnormal agglomeration of angst.” However one understands the term, the probabilists at luckbox lean into assessing the possibility of outlier outcomes—like a future that comes to a screeching halt because of climate change, hostile AI or simple bad luck.

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lately he’s changed his tone—if not his message.

In a New York Times op-ed piece entitled It’s Not Too Late, Gore writes that 72% of Americans accept the evidence that the weather’s becoming more extreme. So, the political power to combat climate change is growing and could prevail, he maintains.

Meanwhile, institutional investors are pondering the environmental, social and political implications of climate change, according to Pensions & Investments magazine.

“Climate change was the top ESG (environmental, social and governance) criterion for money managers representing $3 trillion in assets and the third-biggest issue for institutional investors with a collective $2.24 trillion in assets,” the magazine’s editors say.

Others agree. Climate change jumped from third to first place in the latest Extreme Risks report from Willis Towers Watson Investments’ Thinking Ahead Institute. For the first time, the institute’s list of the top 15 concerns includes the category of biodiversity collapse, a direct result of climate change, notes Tim Hodgson, head of the London-based institute.

But the Great Climate Change Awakening is coming too late, Jonathan Franzen laments in a New Yorker magazine story called What If We Stopped Pretending? “The climate apocalypse is coming,” he warns. “To prepare for it, we need to admit that we can’t prevent it.”

The opportunity to “solve” the problem may have slipped away as early as 1988, about the time when science first made the consequences clear, Franzen says. “If you’re younger than sixty,” he says, “you have a good chance of witnessing the radical destabilization of life on earth—massive crop failures, apocalyptic fires, imploding economies, epic flooding, hundreds of millions of refugees fleeing regions made uninhabitable by extreme heat or permanent drought.”

It gets worse. The titles of recent books should send a chill down humanity’s collective spine. Take note of The Uninhabitable Earth:

If climate catastrophe seems

sider

too far off or too abstract, con

the grim possibility of 21st century technology running amok and simply

of the blowing up a sizeable portion Life After Warming by David Wallace-Wells or The Sixth Extinction: An Unnatural History by Elizabeth Kolbert.

But if climate catastrophe seems too far off or too abstract, consider the grim possibility of 21st century technology running amok and simply blowing up a sizeable portion of the earth’s population in World War III. The conflagration could occur by accident. Increasingly sophisticated killer AI robots and other machines programmed for defense could go rogue and commit mass atrocities, a former Google executive told a British newspaper.

“The likelihood of a disaster is in proportion to how many of these machines will be in a particular area at once,” the whistleblower said.

“What you are looking at are possible atrocities and unlawful killings even under laws of warfare, especially if hundreds or thousands of these machines are deployed.”

So having fewer lethal machines would reduce the probability of disaster. Even better, nations could do away with such weapons by signing an agreement modeled on the Geneva Conventions, a set of rules for warfare laid out in a series of treaties that started in 1864. That’s why Elon Musk and 116 other experts signed an open letter to the European Union in 2017 calling for an outright ban of killer robots.

Accidental wars aside, the next holocaust might occur by design.

Terrorists could combine 3D printing with artificial intelligence to create nuclear, chemical or biological weapons, according to a report from the Middlebury Institute of International Studies at Monterey, CA. A country such as North Korea, which already has a WMD program,

earth’s population in WW III.

could increase weapon output by using the tech to rapidly print parts.

Another nation or terrorist group could use the tech to discreetly establish a new WMD program.

In another scenario for designer war—one that doesn’t require expensive delivery systems—terrorists could use new gene technology to create biological weapons capable of wiping out masses of people.

Meanwhile, the rise of authoritarian leaders could also make war more likely. A single person wielding great power might not intend to start a conflict but could make a series of decisions that combine to result in a catastrophic war without any intention to have one, experts agree.

If humans continue to fight 50 wars per century, the probability of seeing a war with battle deaths that exceed 1% of the world’s population in the next 100 years is about 13%, according to Bear F. Braumoeller, a professor at The Ohio State University and author of Only the Dead: The Persistence of War in the Modern Age. That would amount to at least 70 million people killed.

When a war has had more than 1,000 battle deaths, there’s about a 50% chance it will be as devastating to combatants as the 1990 Iraq War, which killed 20,000 to 35,000 fighters. There’s a 2% chance—about the probability of drawing three of a kind in a five-card poker game— that a war could end up as devastating to combatants as World War I. And there’s about a 1% chance that its intensity would surpass that of any international war fought in the last two centuries.

In light of climate change, deadly smart weapons and humankind’s propensity for conflict, a contrarian might wager that futurism’s future will be shorter than its past.

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A Future Without Free Will The convergence of biology and technology could take control of the human mind, warns futurist Yuval Noah Harari

The liberal belief in the feelings and free choices of individuals is neither natural nor very ancient. For thousands of years, people believed that authority came from divine laws rather than from the human heart, and that we should therefore sanctify the word of God rather than human liberty.

Only in the last few centuries did the source of authority shift from celestial deities to flesh-and-blood humans.

Soon authority might shift again— from humans to algorithms. Just as divine authority was legitimized by religious mythologies, and human authority was justified by the liberal story, so the coming technological revolution might establish the

The myth of free will is destined to crumble when machines know people better than people know themselves, predicts Israeli historian and philosopher Yuval Noah Harari. That’s the moment when humanity will cede authority to algorithms, he maintains.

In his latest best-seller, 21 Lessons for the 21st Century, Harari explores what he views as some of the greatest challenges and choices affecting politics, technology and society.

Harari’s ideas have inspired admiration in distinguished circles. Microsoft founder Bill Gates described Harari’s new book as “fascinating.” Twitter co-founder and CEO Jack Dorsey said of Harari, “I’m drawn to Yuval for his clarity of thought.”

The following collection of excerpts comes from “The Technological Challenge,” which is Part One of Harari’s new book.

Harari

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authority of Big Data algorithms, while undermining the very idea of individual freedom.

Though liberalism is wrong to think that our feelings reflect free will, up until today relying on feelings still made good practical sense. For although there was nothing magical or free about our feelings, they were the best method in the universe for deciding what to study, whom to marry, and which party to vote for.

And no outside system could hope to understand my feelings better than me. Even if the Spanish Inquisition or the Soviet KGB spied on me every minute of every day, they lacked the biological knowledge and the computing power necessary to hack the biochemical processes shaping my desires and choices. For all practical purposes, it was reasonable to argue that I have free will, because my will was shaped mainly by the interplay of inner forces, which nobody outside me could see. I could enjoy the illusion that I controlled my secret inner arena, while outsiders could never really understand what was happening inside me and how I make decisions.

Accordingly, liberalism was correct in counseling people to follow their hearts rather than the dictates of some priest or party apparatchik. However, soon computer algorithms might be able to give you better counsel than human feelings.

As the Spanish Inquisition and the KGB give way to Google and Baidu, “free will” likely will be exposed as a myth, and liberalism might lose its practical advantages.

For we are now at the confluence of two immense revolutions. Biologists are deciphering the mysteries of the human body, and in particular of the brain and human feelings.

At the same time, computer scientists are giving us unprecedented data-processing power. When the biotech revolution merges with the infotech revolution, it will produce Big Data algorithms that can monitor and understand my feelings much better than I can, and then authority will probably shift from humans

PHOTOGRAPH BY VICENS GIMÉNEZ

THE FUTURE

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to computers. My illusion of free will is likely to disintegrate as I daily encounter institutions, corporations, and government agencies that understand and manipulate what was until now my inaccessible inner realm.

To put it succinctly, we can use the following formula: B x C x D = ahh!

Biological knowledge multiplied

by Computing power multiplied by Data equals Ability to Hack Humans.

As you surf the web, watch YouTube or read your social media feed, the algorithms will discreetly monitor you, analyze you, and tell Coca-Cola that if it wants to sell you some fizzy drink, it had better use the advertisement with the shirtless guy rather than the shirtless girl. You won’t even know. But they will know, and such information will be worth billions.

As scientists gain a deeper understanding of the way humans make decisions, the temptation to rely on algorithms is likely to increase.

Hacking human decision-making not only will make Big Data algorithms more reliable but also will simultaneously make human feelings less reliable. As governments and corporations succeed in hacking the human operating system, we will be exposed to a barrage of precision-guided manipulation, advertisements and propaganda. It might become so easy to manipulate our opinions and emotions that we will be forced to rely on algorithms in the same way that a pilot suffering an attack of vertigo must ignore what his own senses are telling him and put all his trust in the machinery.

In some countries and in some situations, people might not be given any choice, and they will be forced to obey the decisions of Big Data algorithms. Yet, even in allegedly free societies, algorithms might gain authority because we will learn from experience to trust them on more and more issues, and we will gradually lose our ability to make decisions for ourselves. Just think of the way that within a mere two decades, billions of people have come to entrust the Google search algorithm with one of the most

important tasks of all: searching for relevant and trustworthy information. We no longer search for information. Instead, we google. And as we increasingly rely on Google for answers, so our ability to search for information by ourselves diminishes.

Today, “truth” is already defined by the top results of the Google search.

As authority shifts from humans to algorithms, we may no longer view the world as the playground of autonomous individuals struggling to make the right choices.

Instead, we might perceive the entire universe as a flow of data, see organisms as little more than biochemical algorithms and believe that humanity’s cosmic vocation is to create an all-encompassing data-processing system—and then merge into it.

We are becoming tiny chips inside a giant data-processing system that nobody really understands. Every day, I absorb countless data bits through tweets and articles, process the data, and transmit back new bits through more tweets and articles. I don’t really know where I fit into the great scheme of things, or how my bits of data connect with the bits produced by billions of other humans and computers. I don’t have time to find out, because I am too busy answering all these emails.

Digital dictatorships are not the only danger awaiting us. Alongside liberty, the liberal order has also set great store by the value of equality.

Liberalism always cherished political equality, and it gradually came to realize that economic equality is almost as important. For without a social safety net and a modicum of economic equality, liberty is meaningless. But just as Big Data algorithms might extinguish liberty, they might simultaneously create the most unequal societies that ever existed. All wealth and power might be concentrated in the hands of a tiny elite, while most people will suffer not from exploitation but from something far worse—irrelevance.

If we want to prevent the concentration of all wealth and power in the hands of a small elite, the key is to

regulate the ownership of data.

The race to obtain the data is already on, headed by data giants such as Google, Facebook, Baidu and Tencent. So far, many of these giants seem to have adopted the business model of “attention merchants.”

They capture our attention by providing us with free information, services and entertainment, and they then resell our attention to advertisers. Yet the data giants probably aim far higher than any previous attention merchant. Their true business isn’t to sell advertisements at all. Rather, by capturing our attention they manage to accumulate immense amounts of data about us, which is worth more than any advertising revenue. We aren’t their customers—we are their product.

Ordinary humans will find it very difficult to resist this process. At present, people are happy to give away their most valuable asset— their personal data—in exchange for free email services and funny cat videos. It’s a bit like African and Native American tribes who unwittingly sold entire countries to European imperialists in exchange for colorful beads and cheap trinkets.

Liberalism, as used in this article, isn’t a label for left-of-center politics or the Democratic Party.

Instead, it refers to classic liberalism as a political philosophy that counts individual liberty among its highest values.

21 LESSONS FOR THE 21ST CENTURY

4.5 out of 5 An unapologetic globalist offers prescriptions for curing future shocks ranging from technology to terrorism

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THE FUTURE

Picture Tomorrow What will everyday life look like in five, 10 or 25 years?

Writer and filmmaker Luke Kingma of Futurism Studios (owned by renowned futurist Ray Kurzweil’s Singularity University) teamed up with multimedia artist Lou Patrick Mackay to illustrate their irreverent vision of the future in the recently released Futurism: Cartoons from Tomorrow: A Futuristic Comic Collection.

THE TECHNO-REALIST

Futurists tend to fall into one of two camps.

First, there are the technooptimists, who fervently believe technology will save humanity from the perils and pitfalls of an analog world. Imagine a Harvard-educated entrepreneur who presumes that humankind will invariably use social media for good.

Then there are the technopessimists, who warn that technology will destabilize and destroy civilized society. Imagine an eccentric automobile tycoon who presumes artificial intelligence will relegate us to the ranks of lesser primates.

With Cartoons from Tomorrow, the creators posit a third camp— the techno-realists. They believe that technology will be subject to the awkward and messy inclinations of the human condition. —Luke Kingma

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luckbox | november 2019

Audacious predictions about the future through 150 original, singlepanel comics $14.99 runningpress.com

november 2019 | luckbox

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THE FUTURE

LUCKBOX INTERVIEW

Facing Intel Inequality Coding and STEM skills aren’t enough to keep humans relevant in the Age of Artificial Intelligence

Swedish-Australian futurist and innovation strategist Anders Sörman-Nilsson averages 240 travel days a year. He traverses the globe to advise major companies, deliver speeches and share his thoughts on the future.

Organizers of the G20 Summit sought SörmanNilsson as a speaker, and the World Economic Forum nominated him to its list of Young Global Leaders.

His books include Thinque Funky, Digilogue and Seamless. He specializes in “ideas that expand minds and inspire a change of heart.”

He caught the attention of luckbox at a recent international business conference where he declared that most companies are “perfectly prepared for a world that no longer exists.”

Sörman-Nilsson was kind enough to field some general but pressing questions from luckbox.

What trend seems likely to have the greatest positive influence in the next five to 10 years?

The Mirrorworld. This is the emergent third-tech platform— after the web and social media.

It holds huge promise for a more humane world. The Mirrorworld is the parallel digital universe of all physical things. It’s an exponential, immersive version of the Internet of Things, where we will be able to simulate and solve humankind’s biggest problems—from climate change and food security to transhumanist healthcare and social justice.

Everything, human and nonhuman, will become machine readable, and thus could be translated into code, which could

Sörman-Nilsson

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be improved and innovated upon.

Because of that, we can all become futuristic science fiction authors and win both hearts and minds as we showcase what’s to come.

We can predict what the world of 2030 might look like if we don’t intervene or what utopia could be if we do intervene smartly. It will be both a future medium and a second place our digital twins will inhabit—a place where real life can be tinkered with and upgraded.

What trend appears likely to have the greatest negative impact in the next five to 10 years?

Reversionism. We are living in an age where humans no longer have a monopoly on intelligence, where we are becoming cyborgs and where our own intelligence is becoming augmented by artificial intelligence. What concerns me today is not so much that machines are learning—quickly and deeply— but that we as humans, in our state of future phobia, still resist change.

And the reality today is that change doesn’t care whether you like it or not. It will always happen without your permission.

As a society, we don’t just have future shock. We also have present shock, and we desperately hope that being nostalgic is the same thing as being strategic. The global rise of populist politicians who are waving the magic wand of nostalgia play to the fears of victims of future shock and are promising reversionistic time travel narratives to the “good old days.” In this age, many people’s rearview mirrors seem more vivid than their low-res

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vision into the future.

If there was ever a time not to be ignorant, complacent or bigoted, that time is now. The rate of change has never been this fast and will never be this slow again. This may sound shocking, and it is truly testing our adaptive responses as humans. Tech adoption rates today are skyrocketing, the longevity of companies in the Fortune 500 is decreasing at a rapid clip, and automation is affecting both our brawn and our brains.

In this world, AI will be doing to white-collar work what robots have already been doing to bluecollar work. Contemporaneously, education is failing to shift out of the past tense and is suffering a failure of imagination by narrow-mindedly touting the supposed panacea of STEM (science, technology, engineering and math) skills, all of which computers and robots will trump humans at in the future.

We are educating our youth for jobs that will no longer exist and are failing to see today’s digital disruption as a signal from the future that it is time to change— both on a personal and societal level. Reversionism runs the risk of driving a wedge between the human haves and the human havenots, between the futurephiles and the futurephobes, and could have dystopian consequences.

panacea, but the science, technology, engineering and math can be combined with more right-brained skills that are directionally important. Even more critically, we have to invest in humanity’s empathy, creativity, entrepreneurship, innovation, ethics and emotional intelligence.

While AI will excel at left-brain logic, processes, math and datacrunching, AI will be slower to master the right-brain functions of emotion, creation, synthesis and invention. Given that we will want to code our AI to be ethical and humanely empathetic, we would do well to raise our own game and build these muscles first.

We must not digitize faulty

dge Reversionism may drive a we

between haves and have-nots, between futurephiles and futurephobes.

It could have dystopian consequences or underperforming human software. Maybe the irony of this digitization is that it enables every human to tap into true creative genius and have freedom from menial labor. We have the right and obligation to pursue our true humanity and creativity, ushering in a second renaissance of human output and enabling more meaningful human dialogue.

What commonly promoted prediction will not come true?

The commonly held belief that learning to code and focusing on STEM is the only way to future-proof yourself in an age of the machines is fundamentally misplaced.

In the disruptive process that is change, there is a silver lining. We have to remember not to throw out the analog human baby with the digital bathwater. The choice is not necessarily about humanity or technology.

STEM is not an educational

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THE FUTURE

50 Years to Run for Cover Not every luckbox reader will live to see the year 2069, so here’s a preview

To mark the recent opening of the Samsung destination store in London, the electronics maker asked futurists and academics to share their predictions for the next 50 years.

The responses— compiled in the report Samsung KX50: The Future In Focus— are excerpted here.

Samsung KX commissioned this report but does not necessarily agree with all of the participants’ predictions.

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THAT’S ENTERTAINMENT The distinction between “real” sport and computer gaming will erode, and you won’t be able to tell the difference—the graphics will be that good. They’ll be beamed into your brain, and haptics (touch interactions with computer applications) and sensor technology will fool all five of your senses into thinking it’s real. The future will offer more immersive and convincing virtual reality.

Haptic kits already exist, which allow you to experience sensations via armbands, suits and vests, as well as 360-degree vision via your headset. This kit will become more refined. Those clunky headsets will disappear, replaced by nano-tech Metalenses and eventually neural interface technology. There will be affordable haptic full-body suits to use at home and in arcades. Haptic technology and a wide range of sensors will be embedded into everyday clothing—which will be printed on demand using a wide range of new manufacturing technologies such as Holographic 3D printing.

There will be no need to browse Netflix for the kind of show you want to watch. This “procedural content” will be beamed directly into people’s brains using non-invasive neural interfaces. Why sit in front of a big screen when you could put customers in the movie and then play that movie in their heads? Neural interfaces connected to AI, the web and other “hive minds” in the cloud will gauge your mood and then discern whether you want to laugh at a witty comedy or have a good weep over a romantic movie. It will know that you’d enjoy it most if it were set in a familiar location and that it featured a character who looked exactly like your first girlfriend. And there it will be—playing in your head.

People will connect and communicate telepathically on social media networks, again using so-called “internet scale” neural interfaces. They will access and share “hive minds,” in the same way some robots “share minds,” by using AI and the cloud, today.

As bizarre as this might sound, the former technology is already emerging and Facebook CEO Mark Zuckerberg has reportedly said he wants “to turn Facebook into the world’s first telepathic network.” His team has already made huge progress, but it will take decades before anyone manages to sort out the necessary regulatory approval and ethical justification to allow this sort of technology to get to market—just imagine the privacy settings your account (or brain) would need!”

— Matthew Griffin, futurist and think tank founder

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ENHANCED SOCIAL NETWORKING Networking is now truly global. We meet, talk and build face-to-face relationships across geographies, regardless of where we are. Thanks to virtual reality, we have significantly reduced the carbon footprint of company meetings. You don’t miss shaking hands physically with your colleagues because holographic interfaces and biofeedback systems make it feel that you are physically connected and engaged, even when there are 5,000 miles and several time zones between you. After the meeting, you can now play a game of virtual golf together or visit an online “bar” to get drunk, sing karaoke and bond.

Language is no longer a barrier. Brain implants, like the translation device in The Hitchhiker’s Guide to the Galaxy, which swims through your ear into your brain to make any language instantly understandable, have totally changed how we interact with our colleagues across the globe. Learning languages has become unnecessary, unless simply for pleasure.

Politically, the new world will be interesting. Increased social connection will bring people closer. Nationhood could be challenged. Protests will be easier to organize, centralized control by way of governments and national borders may be weakened or may cease to exist. Instead, people will align with causes and engage en masse with likeminded individuals across the world. We will all be seeking to align with “our tribe.”

— Jacqueline de Rojas CBE, president of techUK and cochair of the Institute of Coding

SAFE, RAPID TRAVEL Forget traffic jams, traffic cones, roadwork and even driving yourself. Insurance companies will have finally decided that human steering is just too dangerous and should be left to robotic, autonomous driving systems. So we will be saying goodbye to steering wheels in our cars—unless we decide to go retro and pick up a vintage car from 2020. Of course, it is always possible that driving yourself will become illegal, except on specialized recreational driving circuits.

For longer distances, most city-to-city travel will involve reusable rockets, entering near-space just outside the upper atmosphere, travelling at just under 20,000 miles per hour. Advances already taking place mean that such rockets can take advantage of zero air resistance to offer incredibly fast journey times: travel from London to New York in under 30 minutes. Those of us who won’t be able to afford space commuting will have to continue travelling by old-fashioned airplane. Those planes, however, will travel at hyperspeed, five or six times the speed of sound—around 3,500 miles per hour.”

— Dr. Rhys Morgan, director of engineering and education, Royal Academy of Engineering

ROBOTIC SURGEONS Advances in robotics will change what happens when we go under the knife. Major surgeries will be handled by hybrid teams comprised of robot surgeons and human surgeons, working in complete harmony, to provide a level of care that is safer, cheaper and quicker than human surgeons working alone. Many minor surgical procedures will be automated to a point where robots could perform the procedure whilst you commute to the office in your self-driving medical taxi.

Meanwhile, 3D bioprinting of human organs will evolve to a point where “body farms” will provide instant replacements for organs damaged beyond repair. Already, a 3D bioprinter has been sent to the International Space Station to grow human tissue in space. For those who can afford it, they will even be able to buy replacements that exceed the original specifications of the organs they were born with: eyes with improved vision at night, hearts or lungs that enhance an athlete’s performance, perhaps using a fusion of human and synthetic components.

More people will be born healthy. Imagine a future world where it will be possible to genetically edit human embryos to eliminate many inherited diseases such as cystic fibrosis and sickle cell disease. But since it also will be possible to edit for eye color, hair color, body type and possibly even IQ, concerns will be raised, demanding a ban on the use of such technology. Or it may be affordable only for the rich.

Of course, it may be that in 50 years, costs will have come down and everyone in the world will be able to choose how a baby looks and ensure the baby is disease free.

Nanomedicine—swarms of microscopic nanobots—will be injected in every newborn to swim around blood vessels spotting problems and repairing some automatically without recourse to a doctor.

Today, scientists have already programmed nanobots to shrink cancer tumors in mice.

— Maneesh Juneja, digital health futurist

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THE FUTURE OF FUTURES

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Check out this special section for new ways to embrace futures trading. Easier access and new products are shaking up an old industry.

Bringing Futures Forward As futures trading evolves, contracts are shrinking; now, a new exchange promises to get even smaller

By Tom Preston

ALSO IN THIS SECTION: 28 Pit Stories 32 Something Small Is About to Happen 33 Why Millennials Should Love Futures 34 ETFs in the Crosshairs 36 Politics Has a Futures Market

Becoming a modern investor requires buying shares of stock as the first, fundamental step. That could mean buying 100 shares of Apple (AAPL) or investing $1,000 in a mutual fund.

But that simplicity belies the enormous legal and regulatory apparatus behind those shares of stock or that mutual fund. Without the right infrastructure, stock trading—and especially mutual funds—wouldn’t exist.

Futures, by comparison, are relatively straightforward. Sure, regulations govern futures trading, but an agreement or contract about the price of the future delivery of a product is simpler than ownership in a public company.

That’s why trading futures should become one of the first steps an investor takes, particularly in light of recent innovation in futures products—it’s innovation made possible by the centuries-old relative simplicity of futures.

Stock trading likely began in

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1602 when the Dutch East India Company sold shares of ownership to the public. It wasn’t a huge enterprise by modern standards because the company could keep track of only so many transactions with quill pens.

Buying stock requires properly transferring ownership, making sure the number of shares isn’t greater than authorized, adhering to accepted accounting practices, paying dividends to the right owners and looking after a lot of other details.

That’s why stock trading came centuries after the Babylonians— and later the Greeks and Romans— traded what would now be called futures on agricultural products.

In a largely agricultural economy, the value of buying and selling tons of grain was readily apparent even before it was loaded onto ships or into ox carts.

The Code of Hammurabi included rules about buying and selling goods at a certain price on a future date.

Agreeing to pay a certain number of shekels for a big pile of wheat after the next harvest made sense to both the miller and the farmer, and it required not much more than a handshake. Those handshakes occurred for centuries, smoothing trade and helping producers and users get a firmer grasp of their financial future.

In the late 17th and early 18th centuries, Japan’s Dojima Rice Exchange began to trade futures more formally, and then in the 19th century both the Chicago Board of Trade and the London Metal Exchange were established to do the

same thing in the West. Even though what would become the New York Stock Exchange was established in the late 18th century, stock ownership wasn’t widespread—it was futures prices that influenced economies.

Grain and copper were key commodities, and traders exchanged contracts for huge amounts of those products. That trading provides clues to a certain stage of futures development. A corn future, for example, delivers 5,000 bushels. That’s a lot of corn, and with each bushel weighing about 56 pounds, a corn future wasn’t designed to meet the needs of someone looking to make a batch of succotash. It’s clear that 250,000 pounds is industrial corn.

The same is true for gold (100 ounces), crude oil (1,000 barrels) and bonds ($100,000). Each innovation in futures has carried its industrial past. So, while futures products have exploded to cover just about everything investors want to speculate on or hedge—like equity index futures, currencies, precious and base metals, gasoline, natural gas, interest rates, bitcoin, volatility, and more—they have been “big,” with contracts sized to meet the needs of corporate or industrial users.

Stocks, on the other hand, have always been keyed to the individual investor. It’s always been possible to buy one share of stock instead of the round lot of 100. The arrival of mutual funds in the 20th century enabled investors to buy custom dollar amounts. But innovation in the equity markets has been

slow compared to futures, with exchange-traded funds (ETFs) the next big development in the 1990s.

And funds and ETFs are just ways to repackage stocks. Anyone who’s ever bothered to read the charter for a fund or ETF got a sense of the underlying complexity, which allows adding fees half-hidden from view.

With equity products consumer-sized and their complexity disguised in legalese that’s largely ignored, Wall Street aggressively marketed stocks, not futures. But that’s starting to change. In the last 20 years, investors have become more sophisticated, and demand for consumer-friendly futures products has grown.

Getting small Futures are attractive because they enable individuals to speculate directly on specific commodities like corn or crude oil without having to trade an indirect product like stock in a fertilizer company or oil refiner.

They enable stock index traders to trade the S&P 500 without the fees associated with funds or ETFs. They’re also capital efficient, requiring less initial capital for a given notional value of risk than a similar equity product.

Still, the industrial heritage of futures means different tick increments and sizes, high margin requirements and funky trading hours.

When investors buy 100 shares of Apple or IBM (IBM) or Tesla (TSLA), they make $100 when the stock goes up $1. Not so with futures.

PHOTOGRAPHS: (LME) WIKIMEDIA COMMONS; (NIXON) 1978 SID AVERY/MPTVIMAGES.COM

THE FUTURE OF FUTURES

FUTURES PAST 1697 Dojima Rice Exchange is established in Japan

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1848 Chicago Board of Trade (CBOT) opens first U.S.-based grain futures exchange

1877 London Metal Exchange is established

1971 Nixon changes dollar/gold relationship, opening the door for forex futures trading

1972 The Chicago Mercantile Exchange (CME) creates the International Monetary Market

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PHOTOGRAPHS: (CBOT) WIKIMEDIA COMMONS; (CME) CME GROUP

Against this backdrop, the Chicago Mercantile Exchange launched its E-mini S&P 500 futures in 1997, which are one-fifth the size of the standard S&P 500 futures. Those, along with a handful of other E-mini equity index futures, were pretty much the only consumer-sized futures available.

Twenty years later, the Small Exchange was conceived with individual investors in mind. With sub-$1,000 margin requirements, .01 ticks and $1 tick sizes, the Small Exchange futures products are the most accessible and consumer-friendly to date for equity indices, metals, energy, currencies and bonds.

These innovations should level the playing field between stocks and futures for the attention of the individual investor. The Small Exchange’s smaller products, in particular, take advantage of the natural simplicity of futures. That simplicity is passed on to traders. Investors are no longer restricted to a traditional portfolio comprised of highly correlated equities and equity indices that offer no meaningful diversification.

It’s now possible, and affordable, to assemble a portfolio of futures in equities, interest rates, energy, currencies and metals to create real diversity for an account, even with limited capital. That’s not just about trading futures but also about finding a smarter way to build wealth.

Tom Preston, luckbox features editor, is the purveyor of probability and poster boy for a standard normal deviate.

1982 CME launches S&P 500 stock index futures

Chicago Board of Trade in 1908

In the last 20 years, investors have become more sophisticated, and demand for

consumer-frien

dly futures pro

1992 Electronic futures launched on CME Globex

2002 CME IPOs on the NYSE

ducts has gro wn.

2005 CBOT IPOs on the NYSE

2017 Bitcoin futures open on the Chicago Board Options Exchange (Cboe)

2019 Coming soon: the Small Exchange

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THE FUTURE OF FUTURES

Tales from the Pits Former floor traders recall their favorite moments from Chicago’s trading floors From the first moment I saw the trading floor, I knew I had to be on it. And in the late 1990s, Chicago trading floors were the most important pieces of real estate in the country.

Every economic statistic, political development and international incident instantly funneled through those rooms, shifting the fortunes of an entire community, from locals to clerks to the newspaper seller out in front of the exchange. The world was moved by the exchange and what happened in it.

There was a vital, almost holy atmosphere about the place.”

A CRUDE IBM TRADE My buddy Jules and I were trading partners and we shared a clerk. Clerking on the trading floor was how most new traders got their start in the business. Our clerk’s name was Billy, and on this particularly crazy day Billy had worked his butt off. Although we primarily traded the S&P 100, occasionally Jules and I would put positions on in other stocks and futures. On this particularly busy, down day, Jules asked Billy to run over to the IBM pit to get a quote on a put spread.

He was long and wanted to sell. Just before that, we were chatting about why the market was so weak. The consensus was that it was because crude oil broke to new lows under $10 and was approaching $9 a barrel in a late afternoon free-fall.

Billy, standing near the IBM pit, hand signaled (everything back then was done with hand signals) a $.90 bid for the IBM put spread. At least that’s what Jules thought.

Jules aggressively signaled back, “Sell 50!”

Billy gave him the fill sign and walked back to the S&P pit. This all happened two

minutes before the close.

After the close, Billy told Jules he was price improved on his fill. Jules said great, because he badly wanted out of the IBM position for a profit. Billy snapped back, “What IBM trade?” Things went downhill quickly from there. It turns out Billy heard our crude oil conversion, and with crude oil on his mind he sold 50 crude oil contracts (each contract equals 1,000 barrels) on the all-time low tick of $9.08.

It was a Friday afternoon. I did a goodwill check on Billy over the weekend to make sure Jules hadn’t killed him. He was not a happy camper. Luckily though, the story has a happy ending. Crude opened Monday morning at $8.80, and Jules bought the low and made money on the entire debacle. The crude futures have never traded at that level again.

And no, Billy did not share in the profits.

— Tom Sosnoff traded on the Chicago Board Options Exchange from 1980 to 1999 and is now co-CEO of tastytrade.

—Jonathan Hoenig traded on the Chicago Mercantile Exchange, MidAmerica Commodities Exchange, and Chicago Board of Trade floors from 1996-2000 and is now portfolio manager at Capitalistpig Hedge Fund, a Fox News contributor and the author of The Pit: Photographic Portrait of the Chicago Trading Floor. @jonathanhoenig

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LOOK AT THE SWISS

Traders signaled their intentions on the floor of the Chicago Board of Trade during a typical trading day in 1987.

Seats cost $470,000 that year, up from $243,000 a year earlier.

Traders await the opening bell in 1983.

When I was a young trader in the Deutsch Mark pit, barely making a living, I spent much of my free time in the Chicago Mercantile Exchange library trying to find some methodology that would give me an edge. Those were the days before computers, when you constructed your own charts with a mechanical pencil. I studied candlesticks, Steidlmeyer and some crazy scheme called the Congestion Theory. Nothing worked, and with every passing day, it seemed that my dropping out of law school to trade was not such a great decision.

One day, I went to see a one of my father’s friends who was a successful trader and whom I had not wanted to bother. He was really nice—gave me a pep talk—and, on my way out, he said, “Take a look at the Swiss franc.

It’s an obvious short.” I thanked him and ran to the pit before the market closed and sold five contracts, the largest position I had ever taken. I could barely sleep that night, and when I walked onto the floor at 5:30 the next morning and heard the call in the Swiss was 100 points lower, I could not believe my good fortune. When the market opened at 7:30, unable to contain my excitement, I bought back the five contracts by 7:30:10. I had made $6,250! This was the turning point— the moment my career really began. Then, as it happens, the currencies went into an extremely volatile bear market that began that day and lasted for at least a year, creating a lot of opportunities for pit traders like me.

About six months later, at a social event, I ran into my dad’s friend. We traveled in different circles, and I had not seen him since the pep talk and his life-changing trading tip.

I went over to thank him—to tell him how much I appreciated what he had done for me.

But before I could open my mouth, he said, “I hope you held onto your Swiss.” I looked him right in the eye and said with all the bravado of a successful trader, “Of course.

Caught the whole move down. Changed my life.” And then, thinking about the five contracts I sold on the first day of a historic bear market and bought back 10 seconds later, I did not remember to thank him.

— David Silverman traded on the Chicago Mercantile Exchange floor from 1982-1997 and is now CEO of broker-dealer and marketmaker Alpha Trading LP.

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THE FUTURE OF FUTURES

ALWAYS PUT A NUMBER ON IT I began my trading career on the floor of the Chicago Mercantile Exchange in the days when traders used open outcry trading. They conveyed bids and offers by voice in the pit.

A trader would indicate both a direction (buy or sell) and the quantity to trade. For example, someone looking to buy a Canadian dollar contract would announce his intention by verbally bidding “12 bid for 10,” meaning the trader wanted to buy a maximum of 10 contracts at a price of 7610 (usually the first two numbers were dropped for expediency).

This seemingly confusing method of verbalizing bids and offers worked quite efficiently. Strict adherence to these mechanics was the goal, but not often the practice. This played through in a fashion that definitely caught me off guard one day while trading “calendar spreads” in the forex markets.

Every 90 days, traders would “roll” their positions forward, and a portion of the pit was designated the “roll area.” I would actively make markets in these spreads.

Typically, a larger order in the spreads would be between 100 and 200 contracts, which equated to an exposure ranging from $10 million to as much as $20 million notional.

One day early in the session, an order filler from one of the larger brokerages came into the spread pit and asked where the bid was for the March-June spread. The first mouth open usually got the trade, so in my zeal to quote the market I yelled out, “6 bid at 7,” putting no quantity qualifier on it. The broker turned to me and said, “Buy 7,000.”

Because I had not put a quantity on my bid/offer, I opened myself up to taking any amount another trader wanted. My spread book in most cases never exceeded two to three thousand spreads at any one time. But in a single trade I was now short a 7,000 spread—my largest exposure ever—all because I was trying to be quickest to the order and forgot to “put a number on it.”

Fortunately, with a cooperative market I was able to cover this position and pull about $10,000 in profit on this luckbox of a trade.

— Pete Mulmat traded on the floor of the Chicago Mercantile Exchange from 1980 to 2012 and is now chief commercial officer of the Small Exchange

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Traders in the S&P 500 pit at the Chicago Mercantile Exchange on Oct. 13, 1990.

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YOUR WORD WAS YOUR BOND I loved my time on the trading floor, not only for the opportunity to make big money and live the lifestyle that came with it, but also for the camaraderie among the colorful cast of characters who populated the pits.

Traders came from all walks of life.

There were Ivy League grads, ex-Israeli Fighter Pilots and engineers. Others had barely graduated from high school. Your pedigree didn’t matter. You had to be fast and aggressive. Often, you had to be humble enough to accept defeat, admit your position was wrong and lock in a loser to minimize risk. Hopefully, you would live to fight another day.

The integrity that I witnessed there was astounding. Your word was your bond. It still amazes me when I think of the number of contracts that were Out trade: When two traded amid the chaos traders have and how the vast a miscommajority of out trades munication were settled amicably that will ultimately with words like, “I result in one thought I was buying or both of them, too. If you said I them losing money. sold them, I take your word for it. Let’s split the error between us.”

Some traders did business unethically, but they didn’t last long. Their fellow traders ostracized them because no one wanted to trade with someone who wasn’t true to his word.

— James Dore traded on the Chicago Board of Trade floor from 1991-2016 and is now director of market surveillance for the Small Exchange. @small_exchange

A slow trading day in the soybean pit at the Chicago Board of Trade on Feb. 18, 1988.

Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That’s the other guy’s problem. Nothing you have ever experienced will prepare you for the unlimited carnage you are about to witness. Superbowl, World Series— they don’t know what pressure is. In this building, it’s either kill or be killed. You make no friends in the pits and you take no prisoners. One moment you’re up half a mil in soybeans and the next, boom, your kids don’t go to college and they’ve repossessed your Bentley.

—Louis Winthorpe III, Trading Places (1983)

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THE FUTURE OF FUTURES

LUCKBOX INTERVIEW

Something Small Is About to Happen Don Roberts, president and CEO of the Small Exchange, has big plans to make futures small

Three obstacles have prevented retail investors and traders from adopting futures.

Futures contracts aren’t easy to understand because each contract has its own tick increments, and they were simply too large for most investors to use prudently. Futures seem mysterious to many investors, much the way they viewed options trading a couple decades ago. At the Small Exchange we hope to change all that through the Small, Standard, Simple mantra and educational efforts to inform the public.

Creating smaller futures contracts that are affordable seems like a simple improvement.

What took so long?

Like many breakthroughs in investing, futures were originally designed for industrial, institutional and commercial uses. But retail investors want the same lower-fee investment products that institutional investors use, so the adoption of futures has evolved.

Investors and active traders care about fees.

How will the Small Exchange’s products compare with other investment products offering similar exposures?

We will be shaking things up. The exorbitant fees on existing exchanges for both equity and futures traders present a problem for everyone. The Small Exchange’s products will certainly offer lower costs for futures traders. But perhaps more importantly, the products will provide a better return on their capital relative to products currently offered. For example, say an investor wants to buy 100 shares of an exchange-traded

32

fund (ETF) that costs $50. That would be $5,000 in a cash account or $2,500 in a Reg T margin account. The investor can get the same exposure with the Small Exchange equity index product for about $150. Those efficiencies extend to short sales. To sell a stock short, an investor has to borrow shares, pay interest and return those shares. This creates a hassle for customers and brokerage firms because of the added cost. With a futures contract, an investor can simply sell the indices—a pure play at a lower cost.

The Small Exchange announced a subscription offer. How does that work?

To build the world’s largest customercentric futures exchange, the Small Exchange has developed a pretty cool offering—a lifetime subscription to the exchange that provides half off exchange fees and a reduced price for market data for the lifetime of the holder. More information is available on the website. The offer is valid for all individual retail customers.

Can anyone trade these new futures contracts?

PHOTOGRAPH BY GARRETT ROODBERGEN

Readers tell luckbox that many active stock and options traders don’t trade futures.

Why not?

Futures trading will not fit every portfolio.

Investors can access the Small Exchange if their current brokerages offer futures trading. If a firm doesn’t work with the Small Exchange, investors can call their firms and express interest. The Small Exchange website will soon provide a list of firms participating in the exchange as a resource for investors who seek more options for managing risk and wealth.

Who will be the early adopters of Small Exchange futures contracts?

Initially, active and sophisticated self-directed traders will participate, because the products increase opportunities for cost-efficient hedging and speculation. Later, additional retail investors will flock to futures because of the benefits of increased capital efficiency, lack of account minimums to day trade and absence of short-sale rules. Eventually, passive investors will also adopt our indices as low-cost, pure-play, long-term investment alternatives to ETFs.

Don Roberts

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THE FUTURE OF FUTURES

Why Millennials Should Love Futures Simple access to low-cost, pure plays on commodities resonates with a new generation of investors

By Michael Gough

As a member of the millennials, the age group now in our 20s and 30s, I can attest to the accuracy of at least one generalization about our generation: We prefer “access,” not costly and cumbersome “ownership.” And we value the pure play.

We’d rather grab an Uber or Lyft than commit to onerous car payments and ruinous depreciation. Who needs the parade of bills for gas, oil, tires, batteries, parking, insurance and repairs? Ride-sharing offers door-to-door transportation without undue expense—a pure play.

We also prefer the freedom of renting over the slavery of a home mortgage. Who wants to take responsibility for dripping faucets and leaky roofs?

And why not forget about those pricey resorts? We’d rather spend vacation time in an affordable Airbnb. It’s a roof. And it’s likely to have more personality and more local character than a hotel room— another pure play.

These changes have combined to recast many companies as low-fee businesses providing direct and immediate access to the pure play.

At the same time, purchasing stocks has become increasingly inexpensive and easy. To acquire stock in Starbucks (SBUX), for example, just open a Robinhood or Dough app, search SBUX and hit “buy.”

But before the new products from the Small Exchange, no one had come up with an easy way to trade the price of precious metals. Decades

of legacy financial infrastructure still make it difficult to trade the most popular commodities such as oil, gold and interest rates. What’s the symbol for oil? Well, on a stock trading app there isn’t one.

Sure, we could buy Exxon Mobil stock, but that’s not the pure play. I don’t care about Exxon’s production capacity or quarterly earnings. I just want to make money when oil moves.

I could also buy an oil mutual fund, but that’s just a basket of companies burdened with an unnecessary management fee.

Why should we pay a management fee when we can manage our own money? Look at the discrepancy in performance between crude oil and OIH, an oil services fund in “Oil Futures versus OIH,” right. While oil is up 25% since the start of the year, OIH is down 10%. Yet, $680 million in assets have found their way to this fund, as opposed to the pure play on the price of oil.

Expressing an opinion about oil, interest rates or foreign exchange requires something called a futures contract. These big, fat, legacy financial products provide direct exposure but are also so large they can make a $500 profit one minute and lose $1,000 in the next.

Wall Street had given us two

Oil futures versus OIH While oil is up 25% since the start of the year, OIH is down 10%.

Yet, $680 million in assets have found their way to this fund.

choices: Either zig-zag to pure exposure with a convoluted fund, or trade it all-in with an oversized derivative.

Why not go small? It’s something the new Small Exchange makes possible.

The Small Exchange brings innovation to futures, a market offering capital efficiencies, tax advantages and pure price exposure. It’s time for cost-effective, pure-play, straightforward futures products for all generations, not just those with large sums of money to invest.

Michael Gough enjoys retail trading, running, reading and writing code. He works in business and product development at the Small Exchange, building index-based futures and professional partnerships.

ring information. Why should

Millennials are great at gathe

we

pay a management fee when we can manage our own money?

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THE FUTURE OF FUTURES

Smaller Futures Contracts Put ETFs in the Crosshairs Savvy investors will discover more uses for the smaller futures contracts exchanges are developing

By Michael Rechenthin Exchange-traded funds (ETFs) work well for passive investors—but not for short-term traders or sophisticated investors. Still, anyone looking to reduce risk in a portfolio heavy in ETFs will find the new, smaller futures contracts from the Small Exchange an efficient means of trading, requiring just a fraction of the money that would be needed to buy stocks.

With futures, leverage often comes to around 10-to-1.

ETF investors, on the other hand, provide margin 2-to-1 (or intraday 4-to-1). But not only is the leverage better with futures, the cost is 50% lower.

Then there are the tax advantages. Whether an investor has owned futures for a second, a minute or a month, gains and losses are marked-to-market and taxed at a blended rate of 60% long-term capital gains and 40% shortterm rate (which is ordinary income). But if an investor disposes of an ETF within one year, the government taxes 100% of it at the higher short-term capital gains rate.

Suppose an investor has a portfolio with 100 shares of S&P 500 ETF (SPY) and wants to use a Small Exchange futures product to hedge risk. As shown in “Buy this, not that,” right, 25 shares of SPY are equivalent to one Small Stocks 75. That’s because they both tend to move around $70 per day. To fully hedge 100 shares of SPY, an investor needs four contracts. If the objective is to partially hedge the position, sell one or two of the Small Stocks 75 contracts.

34

Buy this, not that Affordable futures contracts pose unique alternatives to ETFs.

tter with futures, the cost

Not only is the leverage be

is 50% lower

luckbox | november 2019

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THE FUTURE OF FUTURES

Politics Has a Futures Market In prediction markets, traders wager real money on political events. Here are some tips from the pros

By Mike Reddy

What are prediction markets?

Prediction markets operate much like futures markets, except traders buy stakes in future political outcomes instead of commodities, such as foreign currencies or indices.

For example, “Who will win the 2020 U.S. presidential election?” could be a market. In that market, traders would be able to buy “Yes” or “No” shares on individual candidate contracts.

Prediction markets may indicate whether the wisdom of the crowd, paired with the potential of winning or losing money, is more accurate at forecasting political events than traditional methods of measuring public opinion, such as polling.

Whether or not they actually are more accurate has been the subject of a lot of academic research. A 2008 International Journal of Forecasting study, for instance, compared market predictions to more than 900 polls in the five presidential elections between 1988 and the date of the study. It found that “the market is closer to the eventual outcome 74% of the time.”

Where are people predicting?

While the Iowa Electronic Markets (IEM), one of the first modern electronic prediction markets, has oper-

ated since 1988, its popularity—at least among traders active on social media—is eclipsed by predictit.org.

PredictIt, opened in 2014, is run by Victoria University of Wellington, New Zealand, and like the IEM, it received a no-action letter from the Commodity Futures Trading Commission (CFTC) to operate legally for academic purposes.

Every year, the number of traders using PredictIt has grown in the tens of thousands, Will Jennings, the site’s head of public engagement, told luckbox. About 100,000 users have made a trade in the last 90 days, and as many as 200,000 have signed up on the site.

How do PredictIt trades work?

It’s not complicated. After signing up on the site and funding an account, traders may begin forecasting on any of PredictIt’s more than 200 markets. Markets may be structured with single or multiple contracts, depending on what they’re trying to forecast, but every contract is broken into binary “Yes” or “No” options.

Upon expiration, correct contracts pay out 100% and incorrect contracts become worthless.

As far as pricing is concerned, every correct contract pays out $1, and contract prices reflect the market’s

traders using Every year, the number of PreditIt has grown in the tens of thousands 36

forecasted probability that an event will—or won’t—occur. For instance, if the aggregated opinion among forecasters is that Joe Biden has a 20% chance of being elected president in the “Who will win the 2020 U.S. presidential election?” market, a “Yes” share should cost somewhere around $0.20 and a “No” around $0.80.

PredictIt’s maximum bet on a contract in a market is $850, and the site limits the number of traders allowed to bet in each market to 5,000. While that number has been reached in some markets, the volume of traders regularly trading in and out of them means hitting the cap is usually short-lived. PredictIt charges fees only on profits and withdrawals.

When shares are sold for a higher price than paid, PredictIt takes 10% of the profit, and upon withdrawing funds it charges a 5% fee for processing, according to the site.

With a presidential election just around the corner—what Jennings refers to as the “bread and butter of political prediction markets”— anyone with a hunch about what may be in store can put their money where their mouth is.

To explore some strategies for jumping into the world of prediction markets, luckbox talked to two PredictIt regulars about their experiences placing bets.

Retired Los Angeles-based stagehand Scott Supak is a longtime prediction market trader, having made his first trade in 2004

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10/11/19 2:00 PM

PHOTOGRAPHS: (TRUMP) REUTERS/JONATHAN ERNST; (SCHIFF) REUTERS/AL DRAGO; (USMCA) REUTERS/BRENNA NORMAN

on InTrade, a defunct prediction market. Supak said he spends about four hours a day five days a week researching and making trades on PredictIt—but most of that time is spent on researching.

“I cannot stress enough how much you have to do your homework,” Supak said. “People come in and they bet on things without ever having even looked into it.”

In the last year, Supak, who doesn’t consider himself a full-time trader, said he made close to $10,000 forecasting on PredictIt. “You spend a lot of time just sitting here, watching TV, doing what you would otherwise be doing anyway, just waiting for something to happen,” Supak said. “That can’t really be considered work. For the amount of time you put in, it’s pretty rewarding, frankly.”

For strategy, Supak champions a healthy balance of knowing the subject matter, knowing himself and knowing how to take advantage of the markets.

“You have to be good at all the political information—the fast information game.

You have to be good on Twitter, you have to know who to follow, you have to do all of that kind of work,” he said.

Besides the basic homework, traders should also avoid the mistakes that cost gamblers money. “There’s gambler fallacies, there’s all these biases, there’s all these things that you’re not even sometimes aware that you’re suffering from,” Supak said.

“Losing money will teach you fast.”

Instead, he uses the negative risk strategy—when a trader buys “No” shares in more than one of a market’s contracts at cheap enough prices to almost guarantee making money.

“We don’t even care who wins—it doesn’t matter to the negative risk people,” he said. “If you’re just buying ‘No’ shares in every contract, you’re essentially just providing liquidity to the ‘Yes’ buyers. But I do it in a pricing scheme that allows me to instantly make money off the arbitrage.”

Another PredictIt trader, Alex Keeney, is known as “Keendawg” to

followers of his Star Spangled Gamblers blog and podcast. He uses qualitative strategies informed by his experience working in politics and has been trading on PredictIt for a little over a year.

“My background is political, and my background is very communications-focused,” he said. “Where I’m the strongest is anticipating the behavior of Congress and anticipating the behavior of politicians.”

Keeney said he makes trades multiple times a week and often trades out of contracts rather than seeing them through to their closings because of the risk of sudden, unexpected reversals.

Contracts, he said, usually follow a linear course, and once they get close to a 90% probability, he likes to cash out.

But if there’s one thing everyone involved with PredictIt seems to share, it’s the belief that anyone who really wants to put in the effort to do well in forecasting should strive for a better understanding of politics and political goings-on.

Sounds a lot like trading in financial markets.

KEENEY’S BEST BETS Will Donald Trump be impeached in his first term?

Buy “Yes” up to 78 cents. But traders should be able to get a better deal than that. Nancy Pelosi has to impeach Donald Trump or else she’ll lose her speaker’s gavel. The only question is when this will happen, which is extremely complicated and boring to answer but we tackle in on our blog, starspangledgamblers.com. Rest assured, the House will vote to impeach Trump.

Will Adam Schiff be House Intelligence Committee chairman on Dec. 31, 2019?

Buy “Yes” up to 93 cents. Getting rid of this guy would be the same as Democrats publicly saying that the Impeach Trump Movement is a witch hunt and a waste of time. They’re pot-committed to impeaching the president and wedded to Rep. Schiff as the poster boy for it. The only way this market resolves “No” is if Rep. Schiff turns out to be a hologram built by Tom Steyer.

Will Congress ratify the USMCA by year-end 2019?

Buy “No” up to 75 cents. Nancy Pelosi is maxing out on the congressional bench press while she flexes on her members to get in line for a vote to impeach Trump. Once she does, there won’t be energy left in the Democratic caucus to move a controversial bill like the USMCA that will only make Trump look good for delivering on a major campaign promise—a better deal than NAFTA. —@keendawg

Will Trump be impeached in his 1st term?

Schiff Intel Cmte chair on 12/31?

USMCA ratified by Congress in 2019?

Yes

Yes

Yes

89¢ 3¢

35¢

No

No

No

29¢ 2¢

11¢

2.4M Shares Traded

137K Shares Traded

71¢

2¢

3¢

65¢

3¢ 3¢

117K Shares Traded

november 2019 | luckbox

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10/11/19 2:00 PM

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trends life, luxury & the pursuit of happiness

FESTIVALS

Burning Man

A former floor trader shares sights—and insights—from his 15th visit to The Playa Portfolio and commentary by Alan Matthew

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trends

B

urning Man, which bills itself as “the place to find out who you are and then take it a step further,” showcases human ingenuity and inspiration for nine days each year.Thousands of volunteers fuel “The Burn” by building and maintaining backdrops for the global event. This year, the volunteers dazzled attendees with 600 mutant vehicles and 400 art installations. To quote founder Larry Harvey, “Out of Nothing, Everything.”

This was my 15th year attending. My “virgin guest” was a Peruvian shaman with whom I have worked with for 25 years. We have experienced ayahuasca hundreds of times together in the Amazon. Overwhelmed by the multitude of people and profusion of art, he slept for two days after the event.

As always, standout art installations, such as “Monumental Mammouth,”mesmerized the crowd.

My favorite mutant vehicle, “The Mayan Warrior,” is a multi-million-dollar jalopy with a 70,000 watt sound system and a series of Las Vegas-like lasers. I also photographed the dragon art car “Heavy Meta” and “Wet Pussy,” a mobile feline bathtub.

The Burning Man community gathered for the first time in 1986 and has grown into a mindblowing temporary city of 70,000 revelers in Nevada’s Black Rock Desert. It’s an annual mecca for artists, cultural iconoclasts and Silicon Valley icons.

Alan Matthew, former floor trader, is CEO of the venture capital firm Tribal Ventures, LLC

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trends

Mutant Vehicles They’re motorized conveyances that mechanically inclined artists have radically, stunningly, (usually) permanently and (sometimes) safely modified. One observer likens them to “sublimely beautiful works of art floating across The Playa like a Miro painting.

Source: the glossary at burningman.org

Floor trader turned adventure capitalist I spent decades as a commodities trader on the floor of the Chicago Board of Trade (CBOT), starting there as a runner in 1975. From the beginning I was fortunate to work with the best.

Early on, I was an assistant for Lee B. Stern, one the largest grain traders at the CBOT. After that, a wonderful guy, Leonard Eiseman, hired me to work for Continental Grain Co. Len assigned me to one of Continental’s corporate memberships, and in 1977 I became a member of the CBOT. In 1983, I went solo as a trader and enjoyed the freedom and flexibility it gave me to explore the world’s cultures. By the mid-2000s, electronic trading brought the end of the pits. After a few years I decided to re-invent myself and jumped into the deep end of the venture capital pool.

—Alan Matthew

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trends

ARTS & MEDIA

DO DICE PLAY GOD? Professional traders dwell in a complex landscape of uncertainty, probability assessment, decision-making and risk. They also wield powerful digital trading capabilities unimaginable only a few decades ago.

It’s no longer a ticker-tape world where insiders with seats on the exchanges enjoy advantages unavailable to the outside world. The digital revolution has democratized trading, opening the doors to millions while offering an unprecedented array of trading tools to quantify risk and probabilities.

Yet many traders haven’t stopped

DO DICE PLAY GOD? THE MATHEMATICS OF UNCERTAINTY

3.5 out of 5 despite the textbookstyle writing, probability geeks will be entertained

42

to think about the mathematics behind today’s management and mitigation of risk. That will change when they open Do Dice Play God? The Mathematics of Uncertainty, a new book by Ian Stewart.

Stewart acquaints readers with thousands of years of history, explaining how great thinkers, philosophers, physicists and mathematicians have confronted and achieved great insight into uncertainty and probability.

This extremely long undertaking constitutes a magnificent human achievement, he writes.

To help readers digest that progression of knowledge, Stewart creates a chronological framework.

“My Six Ages of Uncertainty run through the most important advances in understanding why we are uncertain and what we can do about it,” he writes.

Each “Age” represents a building block in the foundation of understanding uncertainty.

Through the centuries, step by careful step, one discovery built upon another. Eventually, the secrets of uncertainty and probability were revealed through observation and measurement.

Readers quickly recognize the book as far more than just another commentary on traders’ risk management or general reflections on financial markets and finance. The author also explores uncertainly as it applies to medicine, astronomy, weather forecasting, brain function, artificial intelligence and quantum physics.

Stewart recounts breakthroughs in the quest for deeper understanding of how uncertainty principles fit within the framework of those and other subjects. Every day brings discoveries about

uncertainty, he notes. “The future is uncertain, but the science of uncertainty is the future,” he writes.

His explanation of how the study of probability originated should resonate with luckbox readers: “Probabilities theory grew from the needs and experiences of two very different groups of people: gamblers and astronomers.

Gamblers wanted a better grasp of ‘the odds,’ and astronomers wanted to obtain accurate observations from imperfect telescopes. As the ideas of probability theory sank into human consciousness, the subject escaped its original confines, informing us not just about dice games and the orbits of asteroids, but about fundamental physical principles.”

Traders will recognize such breakthroughs as the defining principles of their own lives. As they read this book they’ll begin to find themselves delving into scientific uncertainty and gaining a sense of the “known unknowns.”

They’ll even come to appreciate the great thinkers who have constructed the framework for understanding uncertainty.

—Mike Hart

“The best throw of the dice is to throw them away.”

—16th-century proverb

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THE DAY IT FINALLY HAPPENS This forward-focused issue of luckbox is brimming with expert advice calculated to help readers place their bets on what will unfold in the future—but at what odds? Have no fear. As luck would have it, Vice magazine columnist Mike Pearl steps up to compute the probability of outlier events in his book, The Day It Finally Happens: Alien Contact, Dinosaur Parks, Immortal Humans—And Other (Im)Possible Phenomena.

Expanding upon his popular Vice column—How Scared Should I Be?—Pearl assigns a probability to each of 19 specific Black Swan events. The list, each covered in a chapter of the book, includes The Day Humans Become Immortal,

The Day a Real Jurassic Park Opens and The Day Nuclear Bombs Kill Us All. The event detailed in an especially compelling chapter, The Day Humans Get a Confirmed Signal From Intelligent Extraterrestrials, has an 80% probability of occurring in this century, according to Pearl.

He backs up that forecast with solid research from NASA, Princeton University and the UK’s University of Nottingham.

Researchers at those institutions estimate the universe has two trillion galaxies—more than enough to produce intelligent life more than once.

“Probabilistically speaking, it’s pretty insane to believe that there aren’t aliens,” Pearl writes.

“A reasonable updated estimate might show there are actually hundreds of billions of habitable planets, but let’s be conservative and say there are one hundred billion habitable planets...there are probably aliens.”

That’s good news for Area 51 freaks, but Pearl warns of the risks of intergalactic conversation.

“The trouble with responding is, quite simply, that the aliens might murder us if they found out we were here. By telling them that we exist, we’d be telling them we have the resources necessary to foster life, and they might reasonably want something of ours—be it water, air or the minerals in our spinal fluid.”

Can’t we all just get along?

—Jeff Joseph

THE DAY IT FINALLY HAPPENS

3 out of 5 making “book” on future events— entertaining but doesn’t present much serious speculation

SCIENCE & FUTURISM WITH ISAAC ARTHUR Futurism podcasts aren’t for everyone.

With work, family, friends and finances vying for attention, it’s difficult to justify carving out time to listen to what may be in store for the distant future. But Isaac Arthur makes it easier.

Arthur’s YouTube channel, once used simply for storing home videos, now features a little over 200 episodes of Science & Futurism with Isaac Arthur, a show also available in podcast form on Apple Podcasts and Stitcher. And since its debut episode in 2014, the channel has amassed over 415,000 subscribers and nearly 50 million total views.

Each weekly episode of Science

and Futurism runs roughly half an hour and takes a close look at one topic. With subjects ranging from “space sports” and jobs of the future to the technological singularity and colonizing Pluto, the show offers something for everyone, even the most passive consumers of science fiction or futurism media.

Despite exploring sometimes strange subjects, the show makes a point of containing discussion within the realm of known science.

As Arthur put it in his 200th episode, Things Which Will Never Exist, “The difference between science fiction, science fantasy and science futurism is that focus on scientific realism.”

That said, most people likely

won’t find themselves bingelistening to the entire library of episodes. Instead, it makes more sense to pick episodes that pique one’s individual interest, as if picking a TED talk. But unlike some TED talks, each episode of Science and Futurism carries a title that tells exactly what the viewer is getting into before hitting play—no clickbait, no confusion.

Listeners don’t need to be physicists to understand or enjoy Science and Futurism—although it wouldn’t hurt. Arthur masterfully manages the balancing act of presenting more complex concepts in a way that’s approachable to average folk without hand-holding, dumbing down or being insultingly simple.

—Mike Reddy

SCIENCE & FUTURISM WITH ISAAC ARTHUR

4 out of 5 a formidable guide to the world that hasn’t happened yet

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THE POKER TRADE

Psychic Poker Play

Players can predict an opponent’s range of possible hands by following a few simple tips

By Jonathan Little

W

orld-class poker players often seem to “know” the hole cards their opponents are holding, almost as though they have psychic abilities. But they’re not blessed with some unnatural gift— they simply understand how hand ranges interact with certain players’ tendencies and personalities.

Unless an opponent is especially bad, players should strive to put them on a range of hands and then, based on their action, narrow that range as play progresses. Don’t simply put an opponent on one specific hand and trust that blind guess all the way to the river.

When someone raises before the flop, for example, they could have A-A, 7-7 or K-Q. As long as they play these hands in the same manner, there’s no way of knowing which one they have. Novice players make the mistake of putting an opponent on exactly one hand but, in reality, the opponent would play many hands in the same manner.

Suppose a tight, straightforward player raises from early position to $25 out of their $500 stack in a $2/$5 cash game. You can immediately narrow the opponent’s range to roughly the hands shown in “Safe bet,” right.

Assume all of the hands in red would be played in the same manner (raised to $25), but perhaps an opponent uses a strategy that also involves limping, resulting in some hands being raised and others being limped. Either way, the raising range will be roughly the same.

Suppose a player calls for $20 more from the big blind. The flop

comes 9 7 6 . Check and the opponent bets $30 into the $52 pot.

Let’s presume that opponent makes the typical mistake of continuation betting with every hand in their range. If that’s the case, a player’s marginal made hands such as K 6 and A-8 have plenty of equity to justify calling, so the player calls.

The turn is (9 7 6 ) 5 .

This is an excellent spot to bet into an opponent, both with best hands as well as draws and made hands that are unlikely to be ahead at the moment because you have far more premium hands (straights) in your range than your opponent. If an

opponent folds all hands worse than three-of-a-kind, he will fold almost everything. (See “The rest of the rest,” below.)

Even if an opponent continues with an overpair, he will still fold 64% of the time, making a lead extremely profitable. Be sure to consider how your range interacts with the opponent’s and then play accordingly.

Jonathan Little, a professional poker player and WPT Player of the Year, has amassed more than $7 million in live tournament winnings, written 14 best-selling books and teaches at PokerCoaching.com. @jonathanlittle

LIMPING: To bet the absolute minimum needed to stay in a hand.

EQUITY: The share of the pot that is yours based on the odds that you will win the pot at that point in play. If you feel you have read your opponent correctly and have more equity in the pot than your opponent (i.e., you have the better hand at that moment) then you generally want to bet.

Safe bet

The rest of the rest

Suppose a tight, straightforward player raises from early position to $25 out of his $500 stack in a $2/$5 cash game. A player can immediately narrow the opponent’s range to roughly the hands shown below.

An opponent who folds all hands worse than three-of-a-kind will fold almost everything.

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THE NORMAL DEVIATE

Volatility: Trading’s Best Crystal Ball Volatility provides a clue about what the future may hold for a stock By Tom Preston

L

Volatility in annual percentage terms enables investors to make direct comparisons between stocks and indices.

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ong-term stock trader? Shortterm options trader? Medium-term money machine? No matter how an investor plans to extract profits from the markets, it pays to know how high or low a stock, index or exchange-traded fund (ETF) might go in the future. Heck, investors also want to know where a future might be in the future.

Well, step up and take a closer look at volatility, because volatility, and only volatility, can provide a clue to what the future holds. Volatility can show where a stock might be at any point in the future. All it takes is some middle school math.

Here’s how.

A trading platform like tastyworks might show that Apple (AAPL), for example, has a 28% volatility. That means Apple has a 68% probability of being somewhere between up 28% and down 28% in one year.

With Apple at $220, that means between about $171.90 and $281.60.

The discussion will turn to that 68% number, but first understand that volatility is expressed in annual percentage terms and gives a range of potential stock prices.

The reason for that convention is that it enables investors to compare the volatility of one stock or index to another without having to wonder if it represents one day’s, one week’s, one month’s or one year’s worth of movement. So, Apple, with 28% volatility, is more volatile than Google (GOOGL), with 20% vola-

tility, and less volatile than Tesla (TSLA) with 50% volatility. Volatility in annual percentage terms enables investors to make apples-toapples comparisons between stocks and indices.

But most investors don’t want an estimate of the range in one year.

They need a range that matches the timeframe for a particular trade, whether it’s one day, one week, one month or anything else. To arrive at that, they can convert the annual volatility into that different timeframe. Simply multiply the volatility by the square root of the number of days in the future divided by 365.

Huh? Read on.

Volatility is really a standard deviation. Remember from college statistics class that the standard deviation is a number that tells how much the individual data points of a sample vary around the sample’s mean.

Translated into the trading world, the standard deviation (i.e. volatility) tells how much the price of a stock might move up or down from its current price. Lower volatility means that a stock likely won’t have big up/down swings (low data variance), and higher volatility means that a stock is more likely to have big swings (high data variance).

Remember that the standard deviation is just the square root of the variance of the data. Variance is the average of the squared differences between each data point and the average. Don’t just take the aver-

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age difference because the points above the average would offset the points below the average and give an incorrectly low estimate of the data’s variability. For example, a stock that moves up 1% one day and down 1% the next would have 0% volatility if one just added them up, which conveys the idea that the stock doesn’t have any volatility at all. To get around that, each data point is squared to make it positive.

The variance is the average of those squared percent changes.

Now, here’s the important step.

Variance has a linear relationship to time. If investors calculate the variance of the percentage changes in a stock’s price for one year, they can double the variance to see what it would be for two years or halve it for six months. But variance isn’t a useful number in itself because no one trades squared stock prices.

Take the square root of the variance to get the data back to the scale that’s usable. The square root of the variance is the standard deviation. And if variance has a linear relationship to time, then the standard deviation has a square root relationship to time. That’s why one needs to adjust annual volatility by the square root of time. That’s the theory. Let’s get to the bottom line.

To see the potential price range for Apple in 30 days, multiply 0.28 by the square root of 30/365, then multiply that by the stock price. Add and subtract that number from Apple’s price to see the theoretical range. (See “Calculating ranges,” below.)

Do this for any number of days to match the trading timeframe.

Now, one standard deviation gives a 68% range, two standard deviations give a 95% range and three standard deviations give a 99% range. To get the 95% and 99% ranges, multiply the number from the first step by two or three, and add and subtract it from the stock price (See “Conclusion” in “Calculating ranges,” below.)

Using volatility that way provides context to an expectation of what a stock might do, or the price target determined for it. A target of $225 for Apple in seven days is well within statistical likelihood. A target of $250 in seven days is outside of three standard deviations and isn’t very likely. Create trading strategies around this information and quantify the potential for success.

That’s the luckbox way.

AAPL Projected price cone to Jan. 17, 2020 expiration IV: 28 Estimated Liquidity: High Correlation with S&P 500: 0.8

SPY Projected price cone to Jan. 17, 2020 expiration IV: 19 Estimated Liquidity: High Correlation with S&P 500: 1.0

Tom Preston, luckbox features editor, is the purveyor of all things probability and the poster boy for a standard normal deviate.

Calculating ranges This is how to calculate the potential price range for a stock.

Apple in 7 days 0.28 x square root (7/365) x $220 = $8.53 $220 +/- $8.53 = $211.47 and $228.53

Apple has a 68% probability of being between $211.47 and $228.53 in 7 days.

Apple in 30 days 0.28 x square root (30/365) x $220 = $17.66 $220 +/- $17.66 = $202.34 and $237.66

Apple has a 68% probability of being between $202.34 and $237.66 in 30 days.

Conclusion $8.53 x 2 = $17.06 $220 +/- $17.06 = $202.94 and $237.06

Apple could theoretically be between those prices in 7 days 95% of the time.

$8.53 x 3 = $25.59 $220 +/- $25.59 = $194.41 and $245.59

Apple could theoretically be between those prices in 7 days 99% of the time.

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TRADER 1. t astyworks platform 2. O ptions chain 3. t astytrade broadcast

3

1

4. A ctive Trader interface

2

5. C rude oil chart

4 5

PETE MULMAT Host of Splash Into Futures on the tastytrade network

FAVORITE BOOK

expand your skills as a trader as a market evolves is a tremendous way to become successful.

their low capital requirements and—by nature—the slower pace of movement in deltas and direction.

Favorite trading strategy for what you trade most? A combination of premium and static delta directional trades. With futures, for many years, you had to either pick a direction or not trade. With the growth in volume and liquidity in options on futures in the last five years, premium selling strategies have been an invaluable tool to enhance returns and add consistency to my trading. Strangles in combination with futures often are my go-to trade. By adding the strangle to a static delta, long or short, I can manage delta expansion on the options while taking advantage of high-volatility situations. To stay engaged in markets and diversify my portfolio, I found defined risk trades, like iron condors, attractive because of

Average number of trades per day?

35

Home Winnetka, Ill. Age 57 Years trading 37 How did you start trading?

I studied economics in school and was fascinated by theory being played out in practice in markets every day.

When I was 15, I started clerking on the floor of the Chicago Mercantile Exchange for my father, who was a cattle trader. I began trading on the floor when I was 20. In the ‘80s, markets were relatively small—the D-mark currency pit I started in had five other traders. When I moved off the floor in 2011, that same pit had 150 traders doing 300,000 contracts per day. Being able to refine and

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luckbox | november 2019

What percentage of your outcomes do you attribute to luck? 30% Favorite trading moment or best trade and why? Oct. 31, 2011. I was trading the Japanese yen as it hit an all-time high in value against the U.S. dollar. I had been short this massive “up move” for several days, fighting a relentless rally. On Oct. 31, the Bank of Japan intervened in the forex markets, buying 5 billion of U.S. dollar/ Japanese yen and taking the currency from lifetime highs of 135 dollar/ yen to 1.24 in less than 10 minutes.

Shorting this rally and the ensuing fall was one of my best.

A RANDOM WALK DOWN WALL STREET

By Burton G. Malkiel $17.99 (Hardcover, 432 pages)

Watch how Pete learned the business

trends

PHOTOGRAPHS: (BLIZZ) RANDY MIRAMONTEZ/SHUTTERSTOCK.COM; (TRADERSEXPO) COURTESY OF TRADERSEXPO; (PARADE) REUTERS/CARLO ALLEGRI; (AMA) REUTERS/MARIO ANZUONI

CALENDAR

2017 BlizzCon

NOVEMBER 1-2 BlizzCon Anaheim, CA 4-10 New York Comedy Festival New York City 5-6 Greenwich Economic Forum Greenwich, CT 7-9 TradersEXPO* Las Vegas 8 Gann Day 9 Association of Professional Futurists’ Futures Festival 2019 Virtual conference 16 Futures Symposium* Los Angeles 22 Gann Day

TradersEXPO

2018 Macy’s Thanksgiving Day Parade

24 American Music Awards Los Angeles 28 2019 Macy’s Thanksgiving Day Parade New York City

DECEMBER 7 Options Symposium* San Francisco 19 Miss America 2020 Competition Uncasville, CT Ciara performs at the 2018 American Music Awards

TradersEXPO, an educational event for active traders, returns to Bally’s and Paris Las Vegas for three days of presentations, special events, workshops and master classes.

Presenters include tastytrade co-CEO Tom Sosnoff, who will deliver an in-depth session titled “When Positive Drift Fails” designed to help traders identify and profit from opportunities in today’s markets.

In total, more than 75 expert traders will discuss strategies, tools, indicators, patterns and trends geared toward making trading easier, more approachable and more profitable for investors with all levels of expertise. *For more information visit tastytrade.com (events)

TWO TREND CHANGES Every year, market directional trends tend to change on the same 10 dates—and two of those dates occur in November, according to legendary trader W.D. Gann. Friday, Nov. 8, marks the midpoint between the fall equinox and winter solstice.

Friday, Nov. 22 begins the final third of the astrological year that starts with the spring equinox. The Nov. 22 Gann Day is the last trading day before a potentially explosive money situation, when money planet Venus is conjunct exaggerator Jupiter. This suggests preparing for a big monetary blowup.

Sure, the blowup could be to the upside, but the tone of the warning suggests a downside event in stocks that’s significant internationally. Gold and the 10-year T-note markets suggest potential highs during the Thanksgiving trading week.

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

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trades actionable trading ideas

CHERRY PICKS

R I PE & J U I CY T RA D E IDEAS

Worst-Case Scenarios Call for Covered Calls

By Michael Rechenthin, Ph.D.

ear of losing money sidelines too many would-be investors. They’re afraid they might buy at the top of the market and sell at the bottom.

So, what would be the worst-case scenario if someone bought at the peak and then sold at the subsequent worst time? How can a covered call— perhaps the most boring of all options strategies—improve performance?

“Worst-case scenarios,” right, shows the results of investing in the S&P 500 (SPY) via a popular exchange-traded fund, compared against buying SPY and selling a covered call $5 above the market.

In nearly every year, the covered call significantly reduces the loss.

That’s because the money received on the call helps reduce the losses.

Right now, the call option in SPY that is roughly 30 days away will help reduce the downside by approximately 1.3%. Do that monthly to reduce downside risk.

What are some covered call ideas? See the table called “Covering up,” right.

F

Sign up for free cherry picks and market insights at info.tastytrade.com/cherry-picks

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Worst-case scenarios Buying at the top and selling at the subsequent 12-month low.

Year

S&P 500

2004

-6%

Covered Call in S&P 500 -2%

2005

-7%

-4%

2006

-8%

-5%

2007

-50%

-37%

2008

-52%

-40%

2009

-27%

-17%

2010

-16%

-12%

2011

-19%

-15%

2012

-10%

-6%

2013

-6%

-4%

2014

-10%

-7%

2015

-14%

-10%

2016

-9%

-6%

2017

-4%

-7%

2018

-20%

-15%

2019

-7%

-5%

Covering up Here are some covered call ideas to use with the SPY. XLP

With the stock at 61, sell the 62 call

Reduces downside by 1%

XRT

With the stock at 41, sell the 43 call

Reduces downside by 1.3%

IWM

With the stock at 148, sell the 150 call

Reduces downside by 2%

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CHEAT SHEET

F LOW C H A RTS A N D C HEC K LISTS FO R T RADERS

11 Trades for 6 Outlooks

By Anton Kulikov & Mike Hart

he research team at tastytrade created the options strategy flowchart below to serve as a mental roadmap in the trade decision process. As with nearly everything in the world of options, the first metric to consider is volatility. Here, the implied volatility rank breaks down into two categories: high is over 30% and low is below 30%. The next step calls for developing an assumption, meaning and expectation around future price movement. Investors

T

have their pick among three choices: bullish, bearish and neutral. The result is an options strategy that a trader might want to consider when placing a trade.

Anton Kulikov is a trader, data scientist and research analyst at tastytrade. @antonkulikov. 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. @mikehart79

START HERE

Low Volatility (<30 IV Rank)

BEARISH Debit Put Vertical • Buy put in the money (ITM), sell put out of the money (OTM) •P robability of profit is 50% Put Diagonal •S hort front month OTM put, long back month atthe-money (ATM) put • Probability of profit less than 50%

NEUTRAL Calendar Spread •S hort ATM call in front month, long same strike call in back month • Increases in implied volatility benefit this position •P ositive time decay • Lowprobability trade

BULLISH Debit Call Vertical • Buy call ITM, sell call OTM • Probability of profit around 50% Call Diagonal • Short front month OTM call, long back month ATM call • Probability of profit less than 50%

High Volatility (30+ IV Rank)

BEARISH Short Call • Sell call OTM • Probability of profit around 80% Call Ratio Credit Spread • Sell two OTM calls, buy one call closer to ATM • Probabilty of profit around 85%

NEUTRAL Wide Iron Condor • Credit put vertical OTM and credit call vertical OTM • Probabiltiy of profit around 60% Strangle • Short OTM put plus a short OTM call • Probability of profit around 70%

BULLISH Short Put • Sell put OTM • Probability of profit around 70% Covered Call • Long stock plus a short OTM call • Probability of profit around 60%

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THE TECHNICIAN

A V E T E RA N T RA D ER TAC K LES T EC HNICALS

Forecasting Price Patterns

By Tim Knight

very culture develops its own brand of futurism. From time immemorial, people have spun tales of clairvoyance, created magical totems like crystal balls and paid homage to legendary prognosticators like Nostradamus.

That hunger to foretell events carries over into the world of financial instruments and trading. Investors long to predict prices with better than 50% accuracy. For a technical analyst, foreseeing price paths involves looking for patterns with high-probability outcomes, or using price analogs, technical indicator crossovers or other such events which, based on past behavior, suggest what’s going to happen next.

These methods are subject to interpretation and subjectivity. For the sake of experiment, let’s instead use historical price data and seasonal trends to project an idealized and hypothetical path forward for a given security. In other words, raw price data from past years will be normalized on a week-byweek basis to extrapolate the future seasonal tendencies of a security. The key will be to determine which securities are candidates for an effective price projection, and which ones aren’t.

Investors can plot prices in a number of ways. The “Show Future Trend,” option in “Choices,” below, for example, projects a hypothetical path two years into the future.

An even more interesting approach is to “dial back” time and see what would have been

E

predicted in the past and compare it to what actually happened. That way, investors can get a decent idea of how accurate a past prediction was and, thus, what the likelihood of making good predictions would be now.

Failed predictions Most of the time, the past seasonality and overall direction of a security will not be useful for predicting what’s ahead. A couple of examples illustrate this fact.

Take a look at the blue line (general area in the red rectangle) in “Nothing to see here,” below. It shows what the system would have predicted a year prior to the chart. It’s plain to see that it wasn’t even close. The shape of the price movement and the ultimate destination after a year had passed had absolutely no resemblance to what actually transpired.

Most of the time, past seasonality and overall direction of a security will not be useful for predicting what’s ahead.

Nothing to see here The shape of the price movement and the ultimate destination after a year had passed had absolutely no resemblance to what actually transpired.

Choices Investors can plot prices in a number of ways.

52

Dow Jones Transportation Index Fund (IYT)

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We can safely assume that, with this method at least, we cannot have any insight into what’s coming next with IYT. (This is what the blue line on the right side of the chart shows.)

In a similar situation, the SPDR® S&P® Oil & Gas Exploration & Production ETF (XOP) was predicted to continue its strong run (the anticipated path surrounded by the red rectangle in the chart, “Bad prediction,” right).

As with IYT, the path was absolutely incorrect, and the predicted price was vastly higher than what actually took place. Indeed, most stocks and funds put through a similar analysis would yield poor results as well.

But don’t discard the method because of a couple of failures. Instances occur when, for whatever reason, securities tend to become more predictable based on past price movements, and thus can create trading opportunities with intriguing probabilities.

Making the (failing) grade If the two previous examples merited a failing “F” grade, the iShares 20+ Year Treasury Bond ETF (TLT) is close to a C+, or perhaps even a B-. The prediction of a continued uptrend was accurate, as shown in “A good example,” right. The shortcoming to this prediction, however, is that the anticipated price movement was much more modest than what actually transpired. Admittedly, hardly anyone foresaw the astonishing surge in price that bonds enjoyed during this portion of the chart, but at least this simple algorithm pointed in the right direction.

An even better result occurred with the Real Estate Exchange-Traded Fund (IYR).

Examine the area enveloped by the red rectangle in “Better result,” p. 54. First, the directional movements over the course of the year were predicted with relative accuracy. It didn’t capture every wiggle of the chart but, broadly speaking, it got the movement right. Far more important, the final price a year after the prediction was extraordinarily close to what was anticipated.

In light of that, it would seem that the optimistic prediction for the next two years of IYR would be worth remembering. The blue line shows clearly seasonal characteristics with notable dips and climbs at certain times of each calendar year. If past predictions indicate the power of present prognostication, the system is suggesting good times ahead for the real estate fund.

Bad prediction The path/prediction here was absolutely incorrect, and the predicted price was vastly higher than what actually took place. In this example, the final price a year after the prediction was extraordinarily close to what was anticipated.

SPDR® S&P® Oil & Gas Exploration & Production ETF (XOP)

A good example The prediction of a continued uptrend was accurate.

iShares 20+ Year Treasury Bond ETF (TLT)

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The High-yield Corporate Bond Fund (HYG) provides an even better example. The model predicted a meaningful drop for several months, followed by stabilization and a hearty rise, erasing all the prior loss and moving firmly upward. That is precisely what happened, and after the entire year had passed, the predicted price was virtually identical to what had really taken place. (See “Model predicts drop,” below.)

Amalgamating previous price data and using those movements to predict future prices based merely on seasonality is simplistic and often misleading. Just because a stock has reliably gone up, for example, during June and July every year for the past decade, doesn’t necessarily mean it’s going to do the same next June and July. However, 10 years of similar behavior certainly suggests it’s more likely to happen than not—because, regardless of reason, that’s simply the behavior for an entire decade.

Financial securities are subject to countless forces, both positive and negative. General market conditions, specific events affecting a corporation or commodity, interest rates, commodity prices and the political environment can all tug the price of a security higher or lower, blind to any past seasonal tendencies. However, a subset of securities tend to be more seasonal than the rest and, in those cases, investors can use the predictive nature of such cycles as another tool in the kit.

Some charts prove more “predictable” than others, and it’s enjoyable to experiment with different securities to see how “trend-friendly” they are. Beyond that, observing how trends and seasonality play out can be fascinating.

Better result This prediction got the movement right.

Real Estate Exchange Traded Fund (IYR)

Model predicts drop The model predicted a meaningful drop for several months, followed by stabilization and then a hearty rise, erasing all prior loss and moving firmly upward.

Tim Knight has been using technical analysis to trade the markets for 30 years. He hosts Trading the Close daily on the tastytrade network and offers free access to his charting platform at slopecharts.com.

Investors can plot prices to get a decent idea of how accurate a past prediction was, and what the likelihood of making good predictions would be now.

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High-yield Corporate Bond Fund (HYG)

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(Weâ&#x20AC;&#x2122;ll put up $5,000 to see.)

ENTER NOW AT tastyworks.com/challenge Full terms and conditions at tastyworks.com/challenge. tastyworks, Inc. (â&#x20AC;&#x153;tastyworksâ&#x20AC;?) is a registered broker-dealer and member of FINRA, NFA, and SIPC. Trading Challenge accounts are not actual brokerage accounts. Trading Challenge trades are conducted in a simulated environment. tastyworks does not guarantee against losses for real trades placed in an actual tastyworks brokerage account. Allowable products and strategies available to Trading Challenge participants may not be suitable for all investors. Please consider your own risk profile and trading needs before trading in a real brokerage account. tastyworks does not make trade re recommendations, and the ability to trade certain products during the Trading Challenge does not constitute a recommendation or endorsement of any kind. Must be 18 years or older to participate.

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MACRO VIEW

O PPO RT U N I T I ES I N G LO BAL M AR K ET DIR ECT IO NAL T R ENDS

5 Tips for Choppy Markets

By Amelia Bourdeau

hese markets are untradeable—there’s too much uncertainty. I’m getting chopped up.”

Does that sound familiar? It might. Portfolio managers and traders have been expressing those sentiments on financial television most of this year.

Trader frustration seemed to boil over in late September when House Speaker Nancy Pelosi announced a formal impeachment inquiry of President Donald Trump—introducing another source of market uncertainty.

Let’s take a look at a chart of the S&P 500 versus VIX Index in “Flip-flop,” right.

How does a trader handle all the flip-flop from risk-off to risk-on trading conditions? Wishing that markets would calm down isn’t a strategy.

Here’s a five-step approach that can help.

T

Flip-flop The chart below shows the S&P 500 versus the VIX Index. The flip-flop—yellow boxes show risk-off periods. The green boxes show risk-on periods.

Accept the fact that choppy markets are likely to persist and that they must be dealt with—don’t try to wait them out.

1

Identify the “market themes” causing volatility and creating the choppy trading conditions. Recent themes include the U.S.China trade war, Brexit, the impeachment inquiry, Federal Reserve Board monetary policy and statements by Fed Chairman Jerome Powell.

2

Look at how markets/asset classes/sectors/ individual equities behave when there’s either good or bad news regarding one of the market themes. Make a cheat sheet of the observations.

For example, when there’s a negative U.S.China trade war headline, the trading environment becomes risk-off. U.S. equity markets tend to fall, volatility rises and the safe-haven currency, the Japanese yen (JPY), strengthens.

Positive U.S.-China trade negotiation headlines or encouraging presidential tweets cause the opposite market effect, creating a risk-on environment. U.S. equity markets rise and safe-haven assets retreat.

Brexit headlines influence the British pound/ 3

Source: Bloomberg LLP

U.S. dollar (GBP/USD) currency pair and the Euro/British pound (EUR/GBP) currency pair the most. Negative Brexit headlines that make a no-deal exit seem more likely can weaken the GBP versus both the USD and the EUR. Positive Brexit headlines, such as a possible extension of the Brexit deadline or news that a no-deal Brexit could be avoided, strengthen the GBP against both the USD and the EUR. After looking back on market behavior when one of the market themes sets the tone for the trading session and making a cheat sheet, formulate a plan for what trades to make during both risk-on and risk-off trading environments.

Shorten the trading time horizon and stay nimble. Set alerts on your mobile phone or trading systems for headlines related to the market themes and be ready to respond with one of the corresponding trade ideas from your cheat sheet.

4

Know the event risk calendar, including trade negotiation dates, Brexit decision deadlines and important U.S. economic releases. Expect more volatility in markets on those days.

No one can anticipate surprise headlines, but investors can exercise some control by knowing event risk dates and having a trading plan ready to respond to the news. It is also important to have trading plan scenarios ready for surprise announcements.

5

Trade Idea Large market themes remain unresolved, so safe-haven assets can strengthen further on market volatility. Look for further Japenese yen strength versus the U.S. dollar. Buy a 104.00 three-month USD/JPY put.

Amelia Bourdeau is CEO at marketcompassllc.com, an advisory firm that provides global macro education and trading strategy to investors at every level. @ameliabourdeau

november 2019 | luckbox

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DO DILIGENCE

QU I E T FOU N DAT I O N HELPS P ROACT IV E INV ESTO RS U NDERSTAND T HEI R PORTFOLI OS

What’s Really Going on Inside That Mutual Fund?

By James Blakeway

n the land of the free, the financial markets offer a nearly limitless choice of stocks. That makes isolating which equities to purchase a painstaking endeavor for large investment firms, let alone do-it-yourself investors.

In fact, the difficulties of stock and asset selection explain the long reign of mutual funds. From 401(k) plans to pension funds, from investment advisers to individual investors, mutual funds have been a staple choice to acquire diversification through the research and management of “industry professionals.” Between 1999 and 2018, the total assets of U.S.-registered mutual funds grew from $6.8 trillion to $17.7 trillion.

Recent years, however, saw a shift away from more traditional mutual funds in favor of index and sector-tracking funds. The latter seek to replicate a market index while benchmarking their asset allocations to match the index weightings. While that seems like the perfect manifestation of “If you can’t beat ‘em, join ‘em,” it has led to cheaper mutual funds for investors.

These funds typically charge a much lower fee for replicating an index, compared with traditional mutual funds where the fees pay for the research and active manage-

I

ment of the assets. So, the questions remain: How do both traditionally managed and index mutual funds affect investors’ portfolios, and how do they compare to the overall market?

Consider the 15 most common mutual funds held by Quiet Foundation clients that use the free portfolio analysis tool built on proprietary Exploratory Portfolio Intelligence (EPI) technology (see “Assessing the funds, p. 59).

These investors represent a subsector of the financial world because they’re decidedly more “hands-on” investors and traders for at least a portion of their net worth.

Entering these mutual funds as an equally weighted hypothetical portfolio into the Quiet Foundation’s EPI system yields some interesting results. One important metric is the correlation of each mutual fund to the S&P 500 Index. The aggregated portfolio correlation to the S&P 500 was 0.7, lowered by the inclusion of popular income and bond-focused mutual funds.

However, many of the equity-focused mutual funds had correlations to the S&P 500 between 0.9 and 1.0. This high correlation makes sense for the Vanguard 500 Index Fund (VFIAX) and the Schwab S&P 500 Index Fund (SWPPX)

FCNTX

The Fidelity Contra Fund’s expense ratio is 0.82%... meaning investors are paying 20 times more in fees for these results.

because those two funds both seek to track the S&P 500 Index.

Research indicates they have done so with relative success and at a low cost to investors (0.04% and 0.02% expense ratios respectively).

More surprising is the high index correlation of funds like the Fidelity Contra Fund (FCNTX). The Fidelity Contra investment goal is capital appreciation through the purchase of stocks that fund managers deem undervalued. Fidelity Contra has underperformed compared to the S&P 500 benchmark in five of the last 10 years. Additionally, the fund’s expense ratio is 0.82%, 20 times the expense ratio for the Vanguard 500 Index Fund, meaning investors are paying 20 times more in fees for these results.

The Quiet Foundation analysis yielded an overall score for the mutual fund portfolio of 42 of 100, earning a rating of “Satisfactory.”

The analysis report highlighted the portfolio’s potential for growth over the next year. The portfolio scored poorly in the diversification category because of a cluster of highly correlated equity mutual funds. The portfolio also received low scores in the liquidity and net opportunity categories.

The liquidity metric ranks securities based on an investor’s

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 are 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. Mutual Fund data from Morningstar.com and icifactbook.org

58

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opportunity to move in and out of that product, which is primarily analyzed via share volume. Because mutual funds are not traded on an exchange, they score poorly in this category. While investors can purchase or redeem mutual fund shares at the end of each business day, they cannot execute fund orders intraday.

The Quiet Foundation report highlights mutual funds highly correlated to liquid exchangetraded funds (ETFs). For example, in this portfolio, the American Funds Europacific Growth Fund (FEUPX) has a 0.92 correlation to the highly liquid iShares MSCI Emerging Markets ETF (EEM).

Quiet Foundation’s analysis also identifies securities in the portfolio with active options markets. As mutual funds do not have listed options contracts, this all-mutual fund portfolio does not earn a high score in this category either.

Note that many Quiet Foundation clients with portfolios consisting of stocks, ETFs and mutual funds have seen high scores on their analysis reports. A broad product mix enables customers to maintain portfolios that have opportunity, stability and—perhaps most importantly—diversification.

Mutual funds still make up an overwhelming percentage of available investment choices for Americans. In many cases, such as retirement plans, they may be the only choice available. If cornered and presented only with mutual fund selections, investors should pay close attention to the details, calculate what each fund will cost in the long run and, as always, do their due diligence.

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

Assessing the funds Here’s some key data on the top 15 most common mutual funds held by Quiet Foundation Clients Fund Description

Fund Symbol

Fund Expense Ratio

Correlation to S&P 500 ETF

Other High Correlated ETF

Fidelity Contra Fund

FCNTX

0.82%

1

-

American Funds Europacific Growth Fund

FEUPX

0.49%

0.8

EEM (0.92)

Fidelity Intermediate Municipal Income Fund

FLTMX

0.37%

-0.4

-

MFS International Value Fund

MINJX

0.63%

0.7

-

Oppenheimer Developing Markets Fund

ODVIX

0.85%

0.8

EEM (0.90)

Pimco Income Fund

PIMIX

1.05%

0.5

-

T. Rowe Price Mid-Cap Growth Fund

RPTIX

0.62%

0.9

-

Schwab International Index Fund

SWISX

0.06%

0.9

EFA (0.94)

Schwab S&P 500 Index Fund

SWPPX

0.02%

1

-

Vanguard Extended Market Index Fund

VEXAX

0.07%

0.9

IMW (0.96)

Vanguard 500 Index Fund

VFIAX

0.04%

1

-

Vanguard Total Stock Market Index Fund

VTSAX

0.04%

1

-

Vanguard Target Retirement 2035 Fund

VTTHX

0.14%

1

-

Vanguard Wellington Fund

VWENX

0.17%

0.9

-

Vanguard IntermediateTerm Tax-Exempt Fund

VWIUX

0.09%

-0.4

-

Between 1999 and 2018, the total assets of U.S.-registered mutual funds grew from $6.8 trillion to $17.7 trillion.

Look under the hood with QF

november 2019 | luckbox

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SPECIAL SECTION luckbox is devoting this month’s tactics section to a special three-part series on futures, courtesy of Small Exchange

tactics essential trading strategies

BASIC

Making the Leap to Futures Understanding the differences and similarities between futures and equities By Mike Hart

E

ven investors with plenty of experience trading equities and exchange-traded funds (ETFs) may find the leap to futures a bit daunting. Futures can be big, and they move fast enough to steamroll the unprepared.

But once an investor becomes familiar with the difference between stocks and futures—as well as some of the latter’s major advantages— futures can become manageable and fit into just about any portfolio.

The mechanics of trading equities options also apply to futures options. Futures can have liquid and active option markets that provide choices for anyone looking for high-probability trading strategies. But first, the basics. Implied volatility is a key to any trading strategy, and the relationship between a futures contract’s implied vol and that of an ETF that is closely tied to that future can be instructive. Examples of ETFs that are closely related to futures include the S&P 500 (SPY), oil (USO) and gold (GLD).

One interesting difference regarding futures volatility is that volatility can expand if price is moving higher or price is moving lower. This can be compared to equity options where volatility typically expands only on down moves.

Worried about getting 300 tons of corn dumped in the driveway because of trading some futures options? Worry not. Options on futures expire into one long/short future, whereas options on equities expire into 100 shares of long/short shares. To avoid assign-

Futures offer the often-overlooked advantage of a favorable tax rate.

60

ment, traders typically close out futures options before expiration. When closing out, aim for a specific profit target or when the option no longer trades as the front month contract. The front-month contract refers to the expiration month that has the highest number of contracts traded, as well as generally the most liquid markets. Sometimes the futures close to expiration are no longer the front-month contract.

A futures contract, like options, has an expiration date. That’s one primary difference from equities. Because of that, it’s important to stay vigilant in active management of positions when trading futures. Rarely are futures contracts held to expiration. Instead, we look to roll futures to the next cycle to add duration to the trade.

Futures require significantly less buying power than equities to obtain static deltas.

That’s often viewed as a dangerous disadvantage because it’s easy for them to become too large. Still, knowing the deltas of a portfolio (beta-weighted delta) sometimes requires adjustments, and futures are a great choice for that because of the low buying power.

Futures can become scalping vehicles as well. Investors can scalp by trading outright contracts, looking for short-term profits. It’s also possible to trade multi-product spreads using another futures contract (pairs trade) or combining with options (covered trades).

An often overlooked advantage of futures is the favorable tax rate. Trades are markedto-market and taxed at a rate of 40% for short term, which is ordinary income. Compare that with equities taxed at 100% at the short-term

A look at the numbers Investors can determine implied volatility by looking at the corresponding volatility product to each future or by using the ETF that most closely follows the future.

Futures Contract

Equivalent ETF number of shares

/ES

SPY = 500

/RTY

IWM = 500

/CL

USO = 1,000

/GC

GLD = 1,000

capital gains rate.

No pattern day trading rule is associated with futures contracts. That means multiple round-turn trades are possible in futures even if an account has less than $25,000. In equities, multiple daily scalp with less than a $25,000 balance will result in locking of the account.

Understanding the differences and similarities between futures and equities dispels the mystery and ameliorates fear. Remember the nervousness of trading that first stock option?

Learning to view futures and futures options as just another product contributes to becoming a fully developed trader with a bigger toolkit. It’s part of making speculative trades or hedging a portfolio. Used correctly, futures can add a new dynamic to any trade strategy.

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.

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tactics

INTERMEDIATE

Sizing Up Futures Contracts Most traders find old school futures contracts too big for their accounts

By Michael Rechenthin

T

o trade futures, begin by understanding the sizes of the products, the expected moves and whether the futures product is appropriate for the size of the account (see “Follow the table” below).

Good thing you got a guy to help determine all that—me! Take the S&P 500 as an example—two products are available: the /ES and /MES. The /ES is worth approximately $144,000 and the /MES

is one-tenth the value at $14,400. The smallest account to consider trading /ES is $21,000—which is approximately 20 times the approximate average one-day move of the product.

Investors who trade with too small an account can risk forcing the closing of a position that otherwise could be profitable.

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

Follow the table Understand the size of futures products and their expected moves. Then determine whether a futures product is appropriate for the size of the account. The /M prefix on the symbols below refers to smaller (micro) contracts.

Description S&P 500

Equities

Dow Jones

Symbol

Russell 2000

Rates Metals Energy

Approximate 1-Day Change in the Contract

0.25

$12.50

$144,350

0.25

$1.25

$14,435

+/- $106

/YM

1

$5.00

$129,835

+/- $917

/NQ

1

$0.50

$12,985

0.25

$5.00

$152,095

Theoretical Minimum Size Account to Trade

+/- $1,058

+/- $92 +/- $1,409

$21,000 $2,100 Approximately 20x

$18,000 $1,800 $28,000

/MNQ

0.25

$0.50

$15,209

+/- $141

$2,800

/RTY

0.1

$5.00

$74,075

+/- $744

$15,000

$0.50

$7,408

30-year U.S. Treasury Bond

/ZB

0.0313

$31.25

$165,938

+/- $869

10-year U.S. Treasury Note

/ZN

0.0156

$15.63

$141,031

+/- $369

$7,500

5-year U.S. Treasury Note

/ZF

0.0078

$7.81

$119,484

+/- $219

$4,400

0.1

2-year U.S. Treasury Note

/ZT

0.0039

Gold

/GC

0.1

/MGC

0.1

Silver Crude Oil

Agriculture

Contract Size (USD)

/ES

/M2K

Foreign Exchange

$ Per Tick

/MES /MYM Nasdaq

Minimum Tick Size

/SI

+/- $74

$1,500 $17,000

$7.81

$215,570

+/- $169

$33,000

$10.00

$154,200

+/- $1,170

$23,000

$1.00

$15,420

+/- $117

0.005

$25.00

$89,700

+/- $1,240

$25,000

$2,300

/CL

0.01

$10.00

$54,270

+/- $1,136

$23,000

/QM

0.025

$12.50

$27,125

+/- $568

$11,000

/NG

0.001

$10.00

$22,200

+/- $565

$11,000

/QG

0.005

$12.50

$5,550

+/- $141

$2,800

Corn

/ZC

0.25

$12.50

$18,363

+/- $190

$4,000

Wheat

/ZW

0.25

$12.50

$23,625

+/- $250

$5,000

Soybeans

/ZS

0.25

$12.50

$42,950

+/- $384

$7,700

Euro FX

/6E

0.00005

$6.25

$139,031

+/- $400

$8,000

Natural Gas

Pound

/M6E

0.0001

$1.25

$13,903

+/- $40

/6B

0.0001

$6.25

$76,788

+/- $514

/M6B Canadian dollar Australian dollar Yen

/6C

0.0001

$0.63

$7,678

0.00005

$5.00

$75,500

/6A

0.0001

$10.00

$67,670

/M6A

0.0001

$1.00

$6,767

0.0000005

$6.25

$118,375

/6J

$800 $10,000

+/- $51

$1,000

+/- $217

$4,400

+/- $273

$5,500

+/- $27 +/- $434

$550 $8,700

november 2019 | luckbox

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tactics

ADVANCED

Taking Futures to a New Level Advanced uses of futures include scalping, pairs trading and delta hedging By Anton Kulikov

F

62

because the trader is involved in two different markets that are correlated but not identical in movement.

Why do that? Usually, traders enter into pairs trades if they think one asset is overbought relative to another positively correlated asset. That way, they reduce overall positional risk but express directional bias in two assets as opposed to just one.

Remember, the assets have to be correlated—but not perfectly. A correlation of 0.6 or higher would suffice. If the correlation is too weak, there’s no reason to believe the asset is overbought or oversold relative to the other because they have no statistical relationship.

A recent example of a profitable pairs trade was selling gold and buying silver. The two assets have a correlation of around 0.75, and in the past few years gold has been rising significantly more than silver on a percentage basis. That led to

Gold versus silver In pairs trading, investors look at the assets’ net changes relative to each other. It doesn’t matter if gold goes up or silver goes down.

an opportunity to sell gold and buy silver, thus expressing the bias that the ratio of gold price to silver price would go down.

Remember, in pairs trading, investors look at the assets’ net

PHOTOGRAPH: REUTERS/JIM YOUNG

utures contracts offer retail traders some strategic advantages that aren’t available with stocks and exchange-traded funds (ETFs), including scalping, pairs trading and portfolio hedging.

Scalping may seem obvious, but futures scalping offers two advantages over scalping stocks or exchange-traded funds: tax efficiency and freedom from pattern day trading restrictions. Unlike stocks or ETFs, futures gains or losses are taxed at a generous 60/40 long-term/ short-term tax system.

That means that no matter how long an investor holds the trade, the feds tax 40% of the profit/loss (P/L) for futures contracts at the standard income tax rate, but 60% of the P/L will be taxed at the much lower capital gains tax rate.

For example, if investors make $10,000 in profits from scalping an ETF, versus $10,000 in profits scalping /ES (futures contract), they pay less taxes on the /ES profits.

Investors should consult a tax advisor about this saving because individual tax rates vary.

There’s also no pattern day trading restriction on futures or their options. That means if an account value is below $25,000, an investor can still trade futures and futures options as many times as they like throughout the day without worrying about getting locked out of the account.

The second futures strategy is called pairs trading, which enables traders to spread risk by buying one contract and selling another. That creates a trade that differs from just going long or short a single contract

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tactics

changes relative to each other. It doesn’t matter if gold goes up or silver goes down. Traders care if the percentage change in silver outpaces the percentage change in gold or vice versa. (See “Gold versus silver,” p. 62).

The third strategy is delta hedging, or portfolio hedging. That’s a great use of futures because it enables investors to rebalance a portfolio’s directional exposure to the market without using a significant amount of capital.

Say an investor has a large portfolio with a beta-weighted delta to the Standard & Poor’s 500 Index (SPX) of +250. All that means is that on average, when the SPX moves up one point, the portfolio gains $250 in value, and when the SPX goes down one point, it loses $250 in value.

But what if that type of volatility seems unsuitable? Or what if an investor wants greater volatility

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in a portfolio and feels +250 is too low? Or what if an investor doesn’t want to be net long the market and thinks the market is going down in the short term?

Well, with futures contracts, investors can efficiently and cheaply change the market exposure of the portfolio, while keeping everything else in the portfolio the same. For example, say an investor wants less volatility than the +250 exposure.

They can achieve that by going short a futures contract that has the S&P 500 as its underlying. The P/L of the futures position will offset the P/L from the portfolio’s market exposure.

The best part is that investors can track how much the futures contract reduces exposure. If one S&P 500 futures contract has a point multiplier of 50, that means each short contract reduces exposure by 50 deltas—it will go from +250 deltas to +200 deltas. If an investor has

With futures contracts, investors can efficiently and cheaply change the market exposure of the portfolio, while keeping everything else in the portfolio the same. two contracts short, then it will go to +150, and so forth. To increase exposure to +300, the investor would go long one contract that would take it from +250 to +300.

A basic rule is that to reduce market exposure is to take the opposite position in the futures contract of the portfolio’s market exposure.

To increase market exposure, take the same directional position in the futures contract as the portfolio’s exposure.

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

Learn more about pairs trading with gold and silver here

10/11/19 11:42 AM

luckbox of the month

WEWORK’S NEUMANNS STILL HAVE EACH OTHER

F

Unicorns behaving badly When Adam Neumann visited WeWork locations, he expected to be greeted with a case of Don Julio 1942 tequila and shot glasses.

WeWork operated its own $60 million private jet.

Adam’s private bathroom at WeWork’s Chelsea headquarters had a shower, sauna and massage table.

Rebekah wanted all of her technological devices to be white, so she had her staff disassemble her phone to spray paint the parts.

Adam would, on occasion, switch from speaking English to Hebrew in employee meetings, leaving nonspeakers in the dark.

For sustainability reasons, WeWork banned meat at employee events and stopped reimbursing meals that included meat. Adam was spotted eating a lamb shank at a company event a short time later.

Adam threw a surprise Run-DMC concert after announcing layoffs affecting around 1,000 employees.

Adam claimed WeWork’s valuation was based on the couple’s energy and spirituality instead of a multiple of revenue.

The couple didn’t leave the company with their tails tucked between their legs.

Take the reader survey. luckbox may publish your comments!

Unfinished business 2010 WeWork is founded in New York’s SoHo neighborhood

64

2014 WeWork goes international, opening a location in London’s South Bank

2015 JPMorgan Chase arranges a $650 million line of credit for WeWork

2017 Softbank invests $4.5 billion in WeWork (eventually upped to >$10 billion)

2018 WeWork loses $1.6 billion on $1.8 billion in revenue

August 2019 WeWork releases S-1 filing for IPO

September 2019 Adam Neumann is ousted as CEO and WeWork pulls its IPO filing

PHOTOGRAPH: SHUTTERSTOCK

ormer WeWork CEO Adam Neumann and his wife, Rebekah Paltrow Neumann, may not seem like luckboxes at first glance. It wasn’t long ago that they were sitting atop the throne of what was supposed to be the United States’ most valuable tech startup with a $47 billion valuation and plans to go public. But everything changed.

The IPO was withdrawn, and plans were made for massive layoffs ranging from 10% to 25% of WeWork’s workforce. Adam and Rebekah felt the heat from investors and had to abandon their control over the company.

What makes the Neumanns the joint Luckboxes of the Month for November is that, despite the controversysaturated nature of their leadership—and their eventual departure from WeWork—the Neumanns didn’t leave with their tails tucked between their legs.

Adam remains WeWork’s non-executive chairman, albeit his voting power was drastically reduced (from 10 votes per share to three). His estimated net worth dropped from $4.1 billion to a more modest $600 million, according to Forbes.

He got away with smoking weed on the private company jet, regularly downing shots of $140-a-bottle Don Julio 1942 at WeWork locations, walking around the office barefoot and blasting loud music, to list just a few of his hijinks.

Rebekah, who served as chief brand and impact officer, got away with demanding the termination of employees minutes after meeting them if she didn’t like their “energy.”

And they both came away with each other.

It’s a romance not too dissimilar from the one in James Cameron’s Titanic, if only Jack and Rose wound up eating caviar in a cozy, temperaturecontrolled private yacht—or surfboard, at least— while watching the Titanic sink before their eyes.

luckbox | november 2019

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luckboxmagazine.com 10 Issues for only the control freakâ&#x20AC;&#x2122;s guide to life, money & probability 1911-LOTM.indd 65

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BY 1893 INSPIRED

F E W H A S T H E S P I C E . H A N D - M A D E I N S M A L L B ATC H E S, U S I N G A M A S H-B I L L INSPIRED BY WHISKEY â&#x20AC;&#x2122;S PRE-PROHIBITION GOLDEN ERA. F E W COMBINES A HIGH RYE CONTENT & PEPPERY YE A ST TO MAKE A UNIQUELY SPIC Y BOURBON.