May 2021 by Luckbox Magazine

life. money. probability.

MAY 2021

PLUS Smart Luck & The Serendipity Mindset Bitcoin Trading Signals Meet the King of SPACs

WALL STREET’S WALK OF FAME Celebrities are stepping into SPACs, and regulators are pushing back. Here’s what investors need to know.

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May 2021

IPO 2.0: SPACs PAGE 12

14 SPACs Have Their Moment

Wall Street is spitting out special-purpose acquisition companies at a frenzied pace—but let the buyer beware.

16 SPAC Bubble Babble

Don’t worry about the market’s supposedly overheated penchant for SPACs. Worry about the armchair SPAC experts. And consider the risk-free arbitrage trade.

20 Star Power

Celebrities from the worlds of sports, entertainment and investing are bringing business acumen to SPACs.

22 The King of SPACs

Doug Ellenoff, founder of one of America’s leading SPAC law firms, explains the wildly popular investment vehicle.

26 A Six-Pack with Mark Yusko

An institutional investor fields six questions about SPACs.

27 Media Coverage of SPACs Some financial journalists can’t be bothered with the hard work of telling the true story of complex investment structures.

May 2021 | Luckbox

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managing editor yesenia duran associate editor mike reddy editor at large garrett baldwin editorial intern kendall polidori technical editor mike rechenthin contributing editors vonetta logan, tom preston creative director jacqueline cantu contributing photographer garrett roodbergen

trends

tactics

life, luxury & the pursuit of happiness

BOOK VALUE

NORMAL DEVIATE

29 The Serendipity Mindset

essential trading strategies INSERT

36 Volatile SPACs: Welcome

CHEAT SHEET

Four Pillars of Options BASIC

47 YOLO Fever ADVANCED

THE PREDICTION TRADE

38 The Cost of Overconfidence

49 Calculating Correlation

REASON’S EDGE

40 Educating New Speculators

trades actionable trading ideas

FOREX

advertising inquiries advertise@luckboxmagazine.com

52 Inoculating the World Against Recession CRYPTO

54 Time to Short Bitcoin? Check These 3 Signals

TIKTOK DOUGH

44 Learning the Trade

FAKE FINANCIAL NEWS

10 Fame, Fortune & Finance

CALENDAR

45 May 2021

DO DILIGENCE

THE TECHNICIAN

58 SPACtacular Growth, Mixed Returns FUTURES

THE LAST PICTURE

64 Retirement Ink Comes

comments, tips & story ideas feedback@luckboxmagazine.com contributor’s guidelines, press releases & editorial inquiries editor@luckboxmagazine.com

56 Special-Purpose ETFs

42 Meet Ilya Spivak

p. 29

editorial director jeff joseph

51 For Moonshots, Avoid ETFs

TRADER

CHERRY PICKS

Meet some serendipitors.

63 Make up for Missed Opportunities

subscriptions & service support@luckboxmagazine.com media & business inquiries publisher: jeff joseph jj@luckboxmagazine.com Luckbox magazine, a tastytrade publication, is published at 19 N. Sangamon, Chicago, IL 60607 Editorial offices: 312.761.4218 ISSN: 2689-5692 Printed at Lane Press in Vermont luckboxmagazine.com

Luckbox magazine

@luckboxmag 2019 & 2020 Best New Magazine Folio Award for Custom Content

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

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editor in chief ed mckinley

Luckbox | May 2021

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SPACs’ BAD RAP If you in the SPAC game you know what I’m talking about We sick of IPOs day one lockin’ us out My man Randy first told me DraftKings would go public It’s mergin’ wit’ a SPAC and the market gonna love it I’m like a SPAC, what’s the hell’s that? You get in on the ground floor It paid big, so I searched and then I found more —SPAC Dream, Cassius Cuvee (feat. Mags Lionne), 2021 In today’s frenzied finance world of YOLO trades, trendy tendies and NFTs, your bubble radar shouldn’t start blinking until some rapper spits rhymes about special-purpose acquisition companies. Well, drop the mic and call us paper hands. In 2019, entrepreneur Richard Branson dusted off the 20-year-old SPAC structure to introduce Virgin Galactic to spaceminded investors in a spectacular initial public offering. Since then, the SPAC comeback has ignited a firestorm of institutional and retail investing. Meanwhile, financial journalists are using the SPAC phenomenon as a vehicle, too. Reporters assert their own toughness and make a showy display of their skepticism by lambasting the very idea of SPACs. Their thinking goes like this: Some SPACs have traded at unreasonable valuations, SPAC sponsors charge high fees, and entertainers and athletes serve as mere shills for SPACs— therefore, SPACs must be bad! But it’s not that simple, as we’re reminded by our conversation with attorney Doug Ellenoff (see p. 22). He’s a partner in the law firm that’s overseen more SPAC deals than any other since the structure began coming

on strong again in 2019. SPACs have become the go-to market vehicle for strong private companies coming out of venture capital and for private equity portfolios. That’s because they offer a faster, cheaper and less restrictive path to funding than traditional, more-regulated initial public offerings or direct listings. When Virgin Galactic burst open the door, the company’s success was duly noted at private companies that sought more expansion capital and by strong operating teams seeking their next platform. Not withstanding the naysayers, SPACs are supplying hundreds of transformational businesses with billions of dollars to become public. But any overheated “next new thing” will invariably cool off. Investors will become more discriminating, fees will come down and the frequency of new issuance will slow. In the meantime, some SPACs appear overvalued, some show promise and a few are brimming with explosive potential. That’s why this issue is packed with perspectives. But discerning readers will burrow through the mountain of information and emerge wiser on the other side. The bottom line is SPACs are not going

Thinking Inside the Luckbox

Luckbox is dedicated to helping active investors achieve skill-derived, outlier results. 1 Probability is the key to improving outcomes in the markets and in life.

2 Greater market volatility brings greater opportunity for traders and investors.

3 Options are the best vehicle to manage risk and exploit market volatility.

4 Don’t rely on chance. Know your options because luck smiles upon the prepared.

anywhere—they’re here to stay. And while SPACs are having their moment, investors can have their moment, too. Instead of speculating on a star management team to negotiate the acquisition of an undervalued private asset, Garrett Baldwin, Luckbox editor-at-large, has a better idea. He shares the specifics behind a consistently profitable, Treasurybacked SPAC arbitrage tactic that savvy, yield-seeking institutional investors are using to lock in profits. They simply buy SPACs that trade at meaningful discounts to their trust redemption values (see p. 16). Like all great high-probability arbitrage plays, these trades will not be around forever. In time, the bubble babble will pass, but SPACs will continue to deliver on their potential to raise funds for innovative but cash-hungry companies that provide good, sustainable jobs and solidly lucrative investment opportunities. Ed McKinley Editor in Chief Jeff Joseph Editorial Director

Watch the SPAC rap video. Or don’t.

Two ways to send comments, criticism and suggestions to Luckbox Email feedback@luckboxmagazine.com Visit luckboxmagazine.com/survey A new survey every issue.

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Luckbox Reader Survey Have you ever invested in or traded a SPAC (special-purpose acquisition company)? Yes . . . . . . . . . . . . . 33.7% No . . . . . . . . . . . . . . 66.3%

If you haven’t invested in or traded a SPAC, are you open to doing so? Yes . . . . . . . . . . . . . 56% No . . . . . . . . . . . . . . 29.3% No opinion . . . . . . 14.7%

Take the reader survey. Luckbox may publish your comments!

Open Outcry There is something interesting about how SPACs can incentivize their investors with warrants and other kickers if you stick around before and after the acquisition is made. I like good incentives. —Adam Parmer, Harrisburg, PA Blank-check companies are a fad and an indication of a hyper-overvalued market. —Waylan Cooper, Little Rock, AK I think SPACs are highly, highly speculative. Some ideas and investments seem bullish and forward-thinking, but as the crazy money flows in chasing the idea, some can become very good short opportunities. —Matt Heid, Cortlandt Manor, NY Investing in a SPAC pre-acquisition means you are investing in the management team. Get a good, focused management team together, and you put the odds of a favorable outcome in your favor. —James Morris, Frisco, TX

The Issue with Space was good, but the prior issue about intelligence was outstanding and I really enjoyed all the info (old and new) that was presented! —John Lovkay, Vero Beach, FL The Issue with Space was my favorite so far. Very interesting topic. Should do more like this! The articles on Oumuamua and “If You Follow The Math, We Are Probably Not Alone” caught my attention. Great read. —Milan Polak, Trieste, Italy

I read the latest issue from cover to cover within 24 hours of receiving it. It is absolutely fascinating, and I learned many things I have always wondered about. —Louis Zawislak, New Orleans

Most [SPAC] reporting has been macro with very little in the way of differentiating or providing insight as to which SPACs may be successful or not! Just because a significant investment amount is backing a SPAC does not mean it will be successful. —John B. Small, Reading, PA

Your thoughts on this issue? Take the reader poll at luckboxmagazine.com/survery

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WHAT IS THIS THYNG?

THYNG, an augmented reality app, links Luckbox magazine articles to additional digital content. Simply scan any page with a THYNG icon to view video footage on a digital device.

1 Download the free THYNG app

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

3 Watch the page come to life with enhanced content!

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SHORT INTEREST

THE ISSUE WITH SPACs

SEE PAGE 20

“It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment.”

“I love the fact that we’re not solely dependent on private equity and that there’s a lot more opportunity for everybody … for small companies and the small investor. I think everybody benefits from opening up the marketplace.” —tastytrade co-founder and co-CEO Tom Sosnoff on the tastytrade SPAC Summit

—SEC Investor Alert, March 10, 2021

ANALYSIS OF 267 SPAC ARTICLES:

113 148 negative neutral

6 positive

“I know more people who have a SPAC than have COVID.” —Andrew Ross Sorkin, New York Times financial columnist and author of Too Big to Fail

Source: Harvard Business Review

Luckbox | May 2021

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“Luck is the best superpower.” —Elon Musk, Twitter, 2020

“While ‘blind’ luck plays a major role in life, we can shape our own destiny and create conditions that make ‘smart’ luck more likely.” —The Serendipity Mindset, Christian Busch

SEE PAGE 29

“Bitcoin is going to be $500,000 easily within the next few years. Look at how much money printing’s going on.” —Kraken Exchange co-founder and CEO Jesse Powell

SEE PAGE 54

“Mechanically, the bitcoin price would have to rise [to] $130,000 to match the total private sector investment in gold.” —JPMorgan, Business Insider

“I want to put this type of opportunity in front of people and show them the basics and that it’s actually not that complicated.”

SEE PAGE 44

—Errol Coleman quoted in “Got a money question? There’s a TikTok for that,” CNN

May 2021 | Luckbox

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FAKE FINANCIAL NEWS

Starstruck by big-name athletes and entertainers, investors stock up on special-purpose acquisition company stocks By Vonetta Logan

A little SPAC-ground Special-purpose acquisition companies, colloquially known as SPACs, have a name that sounds similar to the noise your cat, Lord Meowington, makes before he hurls up a hairball. SPACs have been around since the ‘90s, but investors didn’t want to step into these obscure market instruments in the old days. Then came the roaring 2020s, and that all changed. Investors are rushing to snap up stock in SPACs, which are shell corporations listed on stock exchanges. SPACs exist to buy a private business and take it public. In essence, SPACs provide a route to funding that’s like an initial public offering (IPO) but without all the time, expense and regulatory oversight. The sponsors of a SPAC typically have two years to identify an acquisition target or they must return their investors’ money. Is there a SPAC for relationships? I’ve put two years into this and nothing fruitful has come of it, so I would like all of the money back—as well as my youth. Anyway, over the last few years, SPACs have taken off with notable success stories like DraftKings (DKNG) and Virgin Galactic (SPCE). “Yet with more than nine months to go until the end of 2021, initial public offerings of U.S. SPACs this week surpassed the $83.4 billion the sector raised in all of 2020, data from industry tracker SPAC Research showed,” a Reuters article said. So what happens when Shaquille O’Neal, Steph Curry, Serena Williams, Alex Rodriguez and Ciara walk into a bar and want to put their name on a SPAC?

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Fame, Fortune & Finance

We look to celebrities for lots of things: Which vitamins will give me lustrous hair, how to apologize and sound like you mean it, and how to make sex tapes for fun and profit. But should we be looking to them for the next big investment idea? “In simpler times, famous-people-turnedentrepreneurs bought wineries or invested in car dealerships—or simply created multi-billion-dollar lifestyle companies on the strength of their family brand,” wrote Stephen Kurutz in The New York Times. But there’s a new way to demonstrate cache, and that’s the celebrity-backed SPAC.

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SPAC-nip for celebs Barry Ritholtz, chairman and chief investment officer of Ritholtz Wealth Management, puts it this way: “I imagine that some business manager somewhere says to them, ‘Hey, listen, there’s this hot new financial offering. Let’s put your name and celebrity on it,’” Ritholtz said. “‘You’re going to bring some fairy dust to a SPAC, and the potential upside is tens if not hundreds of millions of dollars.’” SPAC celebs are like the foxy booth babes sprawled across the hood of a car at an auto show, attracting attention and suggesting the car radiates sex appeal. Ask them about torque, and you’ll probably get a blank stare. A-Rod could probably field a question about EBITDA, but is his imprimatur really a good reason to buy a certain SPAC stock? For any celeb who “won’t get out of bed for less than 10 grand,” SPACs have a ton of potential upside. Kurutz, of The Times, lays out the potential payday this way: “Hypothetically, let’s say a SPAC prices at $10 a share and raises $500 million in the public markets. If a celebrity adviser had negotiated 1% of that deal, they are rewarded with a stake in the company worth $5 million.” But say the SPAC finds a successful merger candidate, brings in other investors, and a deal is done at $10 billion. The celebrity’s 1% stake has netted, on paper, a $100 million payday, Kurutz wrote. OK, that’s better than shaking what your mama gave you in a hip-hop video like Ciara, a singer who has attached her name to a SPAC. Also, at least this way she can still eat carbs. SPAC-off So far this sounds like a no-brainer for entertainers and athletes, but how are investors supposed to navigate this inscrutable maze of financial instruments, especially when it seemingly empties out into the “gift shop” of putting more money into famous people’s pockets? The Securities and Exchange Commission (SEC) took to their Twitter account to post a scathing reprimand. “Celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors,” the notice from the SEC,

posted in March read, “Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss.” But the SEC doesn’t stop there. “It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment,” the agency said. That makes it seem like celebrities are deceptively dressed old women in a Grimm’s fairy tale trying to lure you and your fat brother into her cottage so she can cook you. Jim Cramer, host of CNBC’s Mad Money, has said that SPACs are “gimmicky” and “have jumped the shark,” but don’t underestimate the clout of celebrities in a crowded field. “With more SPACs on the market, there is more competition for investor dollars and for attractive merger targets,” according to a Barron’s article. “SPAC offs,” where private companies meet with several SPACs in succession and choose one as a merger partner, have become common. “In some cases, having a celebrity on your side might just clinch a deal,” the Barron’s story said. In his blog and YouTube series, Brian DeChesare offers his take on the threat he believes SPACs pose to passive investors. “For sponsors, SPACs are like call options with payoffs even if the company’s share price falls significantly,” he said. “In other words, you assume the full downside risk when you buy into a SPAC, while the sponsor loses nothing unless the share price falls by more than 90%.” DeChesare’s not wrong. The track record for SPACs has been mixed. “SPACs launched in 2019 and 2020 have mean returns of negative 12.3% and negative 34.9% over six and 12 months, respectively, following merger announcements,” he wrote. SPAC Attack As much as you may love the Shaq-turnedgenie movie Kazaam, the big guy isn’t going to grant your portfolio three magical wishes. “For investors, it’s important not to be dazzled by celebrity star power,” Barron’s cautioned. “Investors are better off focusing on SPACs from sponsors with strong track records from previous ventures, major institutional backing and compensation aligned with investors.”

“Invest because the trade fits the mechanics and your appetite for risk, not because a seven-foot-tall dude who also sells pepperoni pizza told you to.” “Management and board members should have a background that suits the SPAC’s target industry,” Barron’s continued. “A current or retired CEO with operational experience is most valuable of all.” From 2015 to 2019, SPACs led by individuals with C-suite experience outperformed SPACs without such managers by about 40% in the year after their mergers, according to a study the McKinsey consulting firm published in late September. Sure, the red tape of a traditional IPO is arduous and complicated, but investors get the priceless gift of transparency. IPOs typically take six to 12 months, while the process of a “reverse merger” with a SPAC may only require three to five months. But just because you can get Botox injections at your dentist doesn’t mean you should. “The flip side of making things easier for companies is, inevitably, that the risk of fraud to investors goes up. I don’t know any way to square that circle,” said Usha Rodrigues, a professor at the University of Georgia School of Law. Fill in the blank check Luckbox loves liquid underlyings with great volatility. SPACs have provided wonderful trading opportunities as money flows out of stodgier stalwarts like Apple (AAPL) and Microsoft (MSFT), but let us not be led into temptation by empty shells shilling—well, empty shells. Invest because the trade fits the mechanics and your appetite for risk, not because a seven-foot-tall dude who also sells pepperoni pizza told you to. Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the series Rolling Trades on YouTube. @vonettalogan

May 2021 | Luckbox

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THE ISSUE WITH SPACs

Meet the SPAC: IPO 2.0 What investors need to know about the recently resurrected investment structure

or decades, the Russian proverb “Trust, but verify” has guided the United States in its dealings with the Soviet Union and Iran. Today, the same principle applies to SPACs, the special-purpose acquisition companies formed to take private entities public. Investors hand over cash to SPACs because the sponsors assemble trusted executive teams to identify undervalued assets or forge associations with celebrities. Fortunately, investors who decide they don’t like the company a SPAC targets for acquisition have the right to reclaim their funds and pull out of the deal with no questions asked. Still, some observers deem that safety valve insufficient. They complain that SPAC sponsors want a blank check to buy an unknown asset. They decry SPACs as a boon for early investors and a boondoggle for later investors. Even the Securities and Exchange Commission is weighing in with warnings about celebrity-endorsed SPACs. The truth, it would seem, lies elsewhere. But regardless of one’s point of view, the wild resurgence of interest in SPACs has been something to behold. And now Luckbox sorts out the details in

this special section on SPACs, which some regard as IPO 2.0. Coverage begins with an explanation of why financiers developed the investment vehicle and how it works. The author of another article dispels baseless but damaging myths about SPACs. The report begins and ends with WeWork. Busting another myth, Luckbox demonstrates that celebrities who lend their names and reputations to SPACs often offer more than a pretty face or familiar persona. Many who became famous as sports or entertainment figures also have valuable business experience that can inform potential deals. Members of another SPAC-related group have achieved something akin to celebrity status solely on the basis of their work in finance. They’re well-represented in this section in interviews with lawyer Doug Ellenoff, the reputed “King of SPACs,” and ETF manager Mark Yusko, founder of Morgan Creek Capital Management. The section finishes big with an op-ed piece on how and why SPACs get an undeserved bad rap in the media. But this issue’s SPAC coverage doesn’t end there. Check out the Trends, Trades and Tactics sections for more articles on one of the biggest stories in investing.

SPACS IN TIME 1990 Backed by an act of Congress, the SEC begins regulating blank check companies

1992 The SEC directs SPACs to hold the proceeds of their IPOs in escrow accounts

1993 David Nussbaum is credited with creating the first “fundlesssponsored” SPAC

2003 Private equity begins sponsoring SPACs— quality of targets improves

2004 An uptick in capital to the markets helps to fuel a boom in SPAC deals

2007 SPACs hit a thenrecord 66 IPO transactions before retreating sharply

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HOW SPACs WORK

INSIDE

June wants to run a company in a specific sector. She forms a SPAC called NewCo and recruits an experienced management team and advisers. June is the SPAC’s sponsor.

To raise capital, NewCo files to go public on an exchange.

Investors buy NewCo shares at $10 and typically receive fractional warrants at $11.50.

NewCo goes public. As sponsor, June retains as much as 20% of the shares and some warrants.

NewCo has two years to identify and acquire a target company in June’s specified sector.

NewCo identifies TargetCo and negotiates the acquisition terms.

14 The SPAC Moment

Deals are multiplying at a frenzied pace

16 Bubble Babble

Beware of those armchair SPAC “experts”

20 Star Power

SPAC celebrities supply business acumen

22 King of SPACs

Doug Ellenoff on the state of the industry

26 SPAC Six-Pack

Mark Yusko describes the vehicle’s advantages

27 Media Matters Many journalists don’t understand SPACs

NewCo shareholders vote to acquire TargetCo with money from the IPO. I f the vote fails, NewCo can pursue another target or refund shareholders $10 per share + interest.

Shareholders who don’t approve of the TargetCo acquisition can redeem their shares for $10 + interest.

TargetCo merges with NewCo, trading under a new ticker as a public company on an exchange.

2009 In the fallout of the financial crisis, only one SPAC IPO occurs this year

2015 Goldman Sachs begins investing in SPACs— other investment banks follow

2017 The New York Stock Exchange decides to list SPACs for the first time

2019 Virgin Galactic (SPCE) uses a SPAC in a very successful public offering

2020 SPACs make acquisition deals worth a recordbreaking $157 billion

2021 In the first two months of the year, SPACs make deals worth $170 billion

May 2021 | Luckbox

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THE ISSUE WITH SPACs

SPACs Have Their Moment Wall Street is spitting out special-purpose acquisition companies at a frenzied pace—but let the buyer beware BY CHRISTOPHER VECCHIO

y now, nearly everyone who’s interested in finance has heard of SPACs. They’re the special-purpose acquisition companies typically led by someone with a familiar name—perhaps a well-known fund manager or even a famous athlete. Those famous or nearly famous people fund their SPACs with initial public offerings (IPOs). But the companies they’re launching don’t have any fixed assets or products to sell. Think of them as publicly traded piles of cash. They’re blank-check companies created to buy something else. Investors contribute money to a SPAC, which puts the funds into a trust to acquire one or more businesses. But here’s the catch: If a specified period of time passes without an acquisition, or the acquired company doesn’t

meet an investor’s standards, then the investor can get the funds back. Think of SPACs as synthetic convertible bonds. They’re an investment vehicle that offers the upside convexity of equities and the downside protection of a bond backed by the credit of the issuing company. SPAC frenzy SPAC formation reached an all-time high last year, and it’s continuing at a breakneck pace. Some consider them the ideal investment vehicle in an era of zero interest rates. In 2009, just one SPAC was navigating the deal process, and it was worth $36 million. By 2018, that number stood at 46. At the end of 2020, 254 SPACs worth $82 billion were operating. Thus far in 2021, 213 aspiring SPACs

have filed for an IPO while another 269 are searching for acquisitions, bringing the total to 483 as of March 18. Why not an IPO? SPACs serve as reverse-IPOs. Instead of an established private company raising funds by going public, a SPAC operates as a shell entity that’s already raised funds and is looking to bring a private company public. The IPO process requires a roadshow that lasts several months and includes scrutiny of financial information, but the SPAC process does not. On the day of listing, SPACs are being filled, on average, within an hour of the open, but the average IPO is not seeing fill day-of until at least noon prior to trading. Meanwhile, investors have shifted away

100,000

300

SPAC IPO Transactions: Summary by Year

250

Source: spacinsider.com as of April 5, 2021

200 60,000 150 40,000 100

20,000

0 2009

SPAC IPO COUNT

SPAC IPO GROSS PROCEEDS (MMS)

80,000

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

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Understanding SPACs’ returns With only a few exceptions, SPACs tend to reward buy-and-hold investors at a lower rate than the markets overall. Three-Month

Six-Month

12-Month

ALL

NO N-H Q

AL L

NO N-H Q

ALL

N ON -HQ

Mean Return

-2.9%

31.5%

-38.8%

-12.3%

15.8%

-37.6%

-34.9%

-6.0%

-57.3%

Median Return

-14.5%

-4.6%

-46.9%

-23.8%

-15.9%

-43.0%

-65.3%

-34.6%

-66.3%

Mean Return (Excess over IPO Index)

-13.1%

25.1%

-53.0%

-33.0%

0.4%

-63.1%

-47.1%

-11.8%

-74.6%

Median Return (Excess over IPO Index)

-32.8%

7.1%

-52.1%

-43.2%

-31.0%

-56.3%

-56.5%

-54.8%

-89.9%

Mean Return (Excess over Russell 2000)

-1.3%

37.5%

-41.9%

-10.9%

22.5%

-41.0%

-21.5%

9.7%

-45.7%

Median Return (Excess over Russell 2000)

-16.1%

16.9%

-47.2%

-17.5%

-2.4%

-57.0%

-44.9%

-36.3%

-55.0%

N SPACs

from public markets because of better returns in private equity. After a decade of intense private-equity activity, SPACs are a quick way for private equity to exit monetize assets. The influx of cheap capital and unforeseen levels of fiscal stimulus have curated ample conditions to bring companies public. And after the WeWork IPO debacle, it’s easy to see why Silicon Valley unicorns prefer to go public through SPACs instead of IPOs. In just one month, the value of WeWork plunged from $47 billion to $10 billion, and the IPO was delayed indefinitely. Recent changes With the Securities and Exchange Commission bringing greater scrutiny to SPACs these days, regulators have, in a sense, legitimized them as an investment vehicle. After all, as recently as 2015, Goldman Sachs prohibited investments in SPACs. Now, it has two SPACs of its own.

As private equity investors have exited their positions, the SPAC process is proving more efficient over time. From 2003 to 2015, at least 20% of SPACs were liquidated as a result of the principal failing to find a company to acquire. In 2020, less than 10% of SPACs were liquidated. But just because SPACs are popular doesn’t mean they’re the most efficient place to put capital. The Harvard Law School Forum on Corporate Governance published a study, A Sober Look at SPACs, in November 2020. The authors dissected the return profiles of SPACs, and the results weren’t friendly: • Although SPACs issue shares for roughly $10 and value their shares at $10 when they merge, by the time of the merger the median SPAC holds cash of just $6.67 per share. • The dilution embedded in SPACs constitutes a cost roughly twice as high as the cost generally attributed to SPACs,

L ESS T H A N 10 % O F S PACS W ER E LIQU IDAT ED LAST YEAR A F T E R FA I L I N G TO F I N D A CO M PANY TO ACQU IR E.

even by SPAC skeptics. • When commentators say SPACs are a cheap way to go public, they’re right, but only because SPAC investors are bearing the cost, which makes for an unsustainable situation. • Although some SPACs with high-quality sponsors do better than others, SPAC investors who hold shares at the time of a SPAC’s merger see post-merger share prices drop on average by a third or more. In fact, three-month, six-month and 12-month returns for both “high quality” and “non-high quality” SPACs are disappointing nearly everywhere one looks. Some observers even call SPACs a bubble, and perhaps that’s true. It’s the inherent irrationality of investor behavior that gives the bubble characterization some credence. After all, 2021 has been a banner year for SPACs, even though, historically speaking, SPACs underperform the market. As always, buyer beware. Christopher Vecchio, CFA, is a senior currency strategist for IG Group’s DailyFX, a commodities, equities and forex research firm. @cvecchiofx

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THE ISSUE WITH SPACs

SPAC Bubble Babble Don’t worr y about the market’s supposedly overheated penchant for SPACs. Worr y about the armchair SPAC experts. And consider the risk-free WeWork trade. BY GARRETT BALDWIN

n August 2019, the news broke that one of the world’s hottest startups was planning its initial public offering. At first, hungry investors salivated at the prospect of biting into one of the most succulent new commercial real estate trends. But they soon lost their appetite. The company’s S-1 filing with the Securities and Exchange Commission revealed structural problems, spiraling debt and ill-advised loans to its CEO. Many questioned whether the company would ever turn a profit. The IPO collapsed. The CEO exited with a multi-billion-dollar payout. And the company’s lofty $49 billion valuation turned into a punchline. But less than two years later, WeWork was looking to go public again. This time, however, nobody was talking about a traditional IPO, and the shared-workspace company’s valuation had been cut by 80%. But the company shared documents with potential investors that said it would seek $1 billion through a deal with a special-purpose acquisition company, or SPAC—a company formed to acquire a private company and take it public. The media and academia responded with a frenzy of criticism. Reporters and talking heads gnashed their teeth as they slapped their keyboards. Tying WeWork to SPACs was a dream come true for

headline writers and for reporters who’ve been pumping the word “bubble” into the first paragraph of any story about SPACs. Meanwhile, academics, whose tweed jackets had grown tighter after a year of pandemic-dictated confinement to their armchairs, screamed to the financial gods about the alleged foibles of SPACs. The press and academe were united in their insistence that any WeWork deal would expand the “SPAC bubble.” Their musings became the newest chapter in the media’s long-running critique of SPACs. Three considerations First, criticism of SPACs often centers on a profound misunderstanding of venture-forward vehicles, and it’s nothing new. Second, savvy traders aren’t daunted by the volatility implied by a perceived bubble. Third, virtually no one was discussing the possibility that WeWork might align with Bowx Acquisition Corp., the SPAC aligned with former NBA star Shaquille O’Neal. Still, the speculation alone created something beautiful for anyone with money to put to work—a risk-free trade one could leverage to the hilt. And everyone who was stuck in the conversation about a supposed bubble was failing to grasp the meaning of the opportunity. But for some, that trade has been at the heart of two moves that have generated incredible returns. Best of all, regardless of all the bubble talk, traders have a chance to exploit this type of deal immediately. But first, let’s delve into the care and feeding of SPACs. All the world’s a bubble Are SPACs in a bubble? Every day, another flurry of headlines suggests wild deal-making and rampant speculation in the land of SPACs. But everyone should know better. In the world of behavioral finance, SPACs are a source of anomalies. In some cases, they create risk-free trades as clean as a pile of cash just off the government presses. In other cases, they create head-scratching speculation that might rival the cryptocurrency craze of 2017 or the non-fungible token bonanza of 2021—at least on the surface. Either way, two factors fuel speculation at the formation of a SPAC.

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PHOTOGRAPH: REUTERS/BRENDAN MCDERMID

First, there’s the degree of confidence investors have in the SPAC management team’s business history. Investors scrutinize the individuals who will lead the SPAC, raise the capital and acquire a profitable private company. For example, investors view the reverse mergers of DraftKings and Skillz as success stories. Those achievements have triggered significant interest in the next SPAC announced by Hollywood executive Jeff Sagansky and his longtime business partners Harry Sloan and Eli Baker at Soaring Eagle Acquisition Corp. Even before Soaring Eagle announced a deal, shares in the SPAC have traded as much as a 12.9% premium to the trust value (or $11.29 per share). The fact that the investment community values shares in a SPAC at more than their trust value of $10 isn’t based on the expectation that the cash itself will somehow gain in value. Before a deal, the added value is tied solely to confidence in the team leading the SPAC. The second and more important factor in evaluating a SPAC’s potential is the size of the pile of cash it has amassed. It has to raise enough funds to buy a promising company. Safety in SPACS Early investors have to evaluate SPACs that haven’t acquired a targeted company. That’s why some analysts find fault with SPACs or believe that the proliferation of SPACS indicates they’re in a bubble. But two elements are driving the bubble sentiment. First, retail investors typically aren’t familiar with alternative investments. While it’s true that SPACs are speculative and volatile, most venture capital deals are speculative, volatile and—a key distinction—highly illiquid. SPACs offer the safety of guardrails that prevent excessive losses. Industry experts know those guardrails well, but the media fail to explain the benefits and the possibilities of taking part in the pre-deal flow. A traditional unit includes one common share and typically a warrant, which is a call option issued by the company. These derivatives allow the buyer to purchase a fractional share later at an exercise price of $11.50. Warrants usually last for five years after the merger. Also, funds raised in the SPAC’s IPO are allocated to an escrow account of liquid trea-

sury notes that generate interest. Once a deal occurs, the units unbundle and allow the buyer to trade the warrants and shares differently. But the most enticing pre-deal opportunity for investors is the “approve or redeem” clause that comes with being a unitholder. After a SPAC announces what company it has acquired, unitholders either approve the deal or simply reject it and redeem for the original $10, plus the chance to keep the warrants. Investors who keep their speculation at bay can significantly reduce risk. But unit prices sometimes surge just on the announcement of the SPAC’s formation. The reason people are speculating on piles of cash and SPAC teams might have less to do with the nature of venture capital and more to do with broader market conditions. In a world where illiquidity is the enemy of significant economic downturns (ask Ben Bernanke), the Federal Reserve has just infused the economy with an incredible amount of capital, and the U.S. government is unleashing multiple rounds of stimulus. Inflation might not show up in the Consumer Price Index, but it has surged in all

SO M EDAY, I N V ESTORS MAY LOOK BAC K AT THE R I S K- FR EE W EWOR K S PAC AND WISH T H EY HAD S E I Z ED THE O PPORTU NI TY.

Sir Richard Branson smiles broadly as he rings the opening bell on the floor of the New York Stock Exchange on Oct. 28, 2019 as Virgin Galactic (SPCE) begins public trading. He founded the company in 2004.

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THE ISSUE WITH SPACs

asset classes. People are paying more for less, especially in the S&P 500. Money has to go somewhere. And in a world of non-fungible tokens, record asset prices for alternative investments and sky-high housing costs, what makes SPACs worthy of criticism? Let’s return to the fact that while everything else feels frothy—meaning overpriced—SPAC arbitrage is alive and well. A recent headline in The Financial Times might set Bloomberg terminals on fire.

SPAC TO THE FUTURE In 2019, gross proceeds from SPAC deals totaled $83.3 billion, but they grew to $97 billion for 2020. So, Good Judgement Open asked its forecasters ...

What will be the gross proceeds for special-purpose acquisition company (SPAC) IPO transactions in 2021?

0% Less than $140 billion 4% Between $140 billion and $180 billion 96% $180 billion or more Data as of March 30, 2021 To forecast these and many other questions, visit gjopen.com

SAVVY TRAD E RS AR E N OT DAU N T E D BY THE VOLATILITY O F A BU B B L E

“WeWork tells investors it lost $3.2 billion last year as it woos them for SPAC deal,” it said. The accompanying article displayed all the voyeuristic elements of reality television. The writer described “Project Windmill,” a treasure trove of documents outlining a plan to locate a SPAC. The risk-free SPAC trade On its books, WeWork had slashed capital expenditures from $2.2 billion in 2019 to $49 million in 2020. COVID-19 had caused its occupancy rates to tumble 72% year-overyear. And the company sought a valuation of roughly $9 billion with debt. That gave anyone with a financial blog the opportunity to rekindle the love of bashing the ill-fated WeWork deal and play a redemptive game of Where Are They Now with SoftBank financiers who’d found hope in a string of recent positive IPOs. The market quickly panned any potential WeWork deal despite the lack of details and without a deeper understanding of what type of negotiation or valuation BowX, the SPAC supposedly connected with the deal, might seek. The trust value is $10 per unit with warrants. Yet, the value of the units fell below $10 to as low as $9.77. Shares had previously retreated to as low as $9.53. Because the WeWork deal hadn’t been consummated, the shares were up for grabs for anyone who might want to redeem them should a deal be announced. Once the SPAC announces an acquisition target, shareholders have 24 to 48 hours to vote on the deal. Sometimes the markets like the deal, and other times they do not. But shareholders can redeem their shares for that $10 price. If buyers redeem shares purchased for $9.50, they’ve locked in a guaranteed 5.2% return with interest and no downside. Also, the buyer is allowed to keep the warrants, which have distinct value, more than five years. A no-brainer opportunity Mark Yusko, CEO of Morgan Creek Capital Management, considers the SPAC structure one of Wall Street’s best alignments and a no-brainer arbitrage opportunity for his investors. “I can buy the IPO, or I can buy it below the IPO price even better,” he said. “I hold it to the deal. And now I get to choose, right? Thumbs up or thumbs down. If I’m thumbs

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down, I get my cash plus interest.” Yusko’s praise doesn’t end there. “If I can buy $10 for $9.50, I will do that all day,” he said. “I’ll do that with leverage because there is no outcome where I can lose money. It’s risk-free arbitrage.” The only cost is losing the opportunity to use the capital elsewhere for two years if the SPAC doesn’t acquire a company within that mandated time period, he noted. By definition, shares shouldn’t fall under $10. Yet, they do. In the last 52 weeks, SPACs headed by Sam Zell (Equity Distribution Acquisition Corp.) and Michael Dell (E.Merge Technology Acquisition Corp.) had prices of $9.32 and $9.53, respectively. But Yusko and other experts aren’t just taking advantage of the risk-free opportunity to buy pre-deal SPAC shares for less than $10. News of a deal Another strategy that institutional investors have adopted centers on embracing the guardrails SPACs offer and capitalizing on the behavior that comes with news of a deal. Tim Melvin, an analyst at Thunderclap Research, an independent publisher of financial information [Editor’s Note: This author has a similar role at Thunderclap and is related to Melvin], has covered the SPAC business for more than a decade. One of the few people who read quarterly 13F SEC filings and annual private-equity 10-K SEC filings cover to cover, Melvin has noticed a trend among institutional investors. According to Melvin’s analysis, Apollo Global snapped up stock in as many SPAC IPOs as possible. Following the IPOs, it either sold after the announcement of a deal or rumors of a deal. Meanwhile, Saba Capital launched a SPAC fund and promised it would never pay more than 105% of a SPAC’s trust value. The strategy has been to buy a SPAC for no more than $10.50 and then sell it if a pop comes after a deal announcement or news of a rumor. Organizations that have followed suit include the hedge funds Bulldog Investors, Tudor Investment Corp. and Yusko’s exchange-traded fund at Morgan Creek Capital. “We run a separate fund that does SPAC arbitrage,” Yusko said. “It buys the IPO. It holds the cash, and the trust sells on the deal.” SPACs have arisen because markets have provided fewer incentives to bring compa-

nies public over the last 20 years, according to SPAC attorney Douglas Ellenoff (see p. 22). This fact is commonly lost in the analysis of the framework of the broader market. The ongoing public narrative also displays an incredible lack of awareness about SPAC redemptions and other guardrails. Ellenoff noted that SPAC deal-making is a time-consuming process that requires extensive diligence to bring the management team together with the right target. Leading SPAC dealmakers Neil Shah, at Evercore, or Bennett Schachter, a managing director at Morgan Stanley, reportedly spend significant time evaluating every potential deal’s pros and cons. They also put in a considerable amount of time to match SPAC sponsors with the right private deals. The value of all that homework seems lost on anyone who believes that companies indulge in mergers and acquisitions solely for the purpose of speculation. In the case of WeWork, it was a deal that clearly worked out. The valuation appears to have been appropriate. The management team is strong. Investors could have made that risk-free purchase under $10 and watched their units pop above $13 by April 1. It turns out the market decided it liked the deal, despite the fear of reaching “peak bubble.” As NYU market professor Scott Galloway noted in March, WeWork has possibilities. “Remote work is an interesting trend, one backed by venture capital dollars,” he said. “And even if there isn’t a significant move in office real estate in cities like New York, new flexibilities will emerge.” Already, real estate is rebounding, Galloway continued, noting that San Francisco has recovered from its lowest office vacancy rate in 2020. He also had this to say about WeWork in particular: “At $47 billion, WeWork was overvalued; going public via SPAC at $9 billion, it might be a buy. Prediction: look for WeWork to rise from the ashes of COVID.” Someday, more than a few investors may look back at the time when the WeWork SPAC presented a risk-free opportunity and wish they had seized the moment and climbed aboard this investment vehicle.

“Beware of horses. I mean, a horse is a horse of course, but who rides is important.” —Lyrics from A Report to the Shareholders, Run the Jewels (2016)

C RI TI CI SM OF SPACS O FTEN CEN TERS O N A PROFOUN D M I SUN DERSTAN DI N G O F VEN TUREFORWARD VEH I CLES, AN D I T’S NOTH I N G N EW.

Garrett Baldwin, economist, author and Luckbox editor-at-large, serves as co-host of Lunch Money on the tastytrade network.

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JAY-Z Shawn Corey Carter, more commonly known as Jay-Z, has established himself as one of America’s most influential recording artists. But the rapper, songwriter, record executive and record producer has also become a wildly successful investor. In fact, he parlayed his music-industry prowess with his knack for business to become hip-hop’s first billionaire. Since 2005, he’s made 10 personal investments and one partner investment, with his most recent in Therabody, a tech wellness company. He entered the SPAC sphere as chief visionary officer for The Parent Co., a cannabis producer and distributor that completed a merger in January with CMG Partners Inc.’s Caliva and Left Coast Ventures Inc. The Parent Co., formerly known as Subversive Capital Acquisition Corp., has $381 million in cash to deploy for deals and aims to dominate the California cannabis market, the world’s largest.

investing bring business acumen and panache to SPACs

SHAQU I L L E O’ N E A L

SERENA W I L L I A MS

A L EX RO D R I GU EZ

Think of Shaquille O’Neal, or Shaq, as a master of many trades. The basketball legend has also made his mark as a rapper, DJ and TV sports analyst, not to mention his MBA and doctorate in education. Shaq has sustained his wealth through a long list of investments. While in the NBA, he brought in nearly $300 million, but post-NBA his net worth soon reached $400 million because of stakes in businesses such as Five Guys, Papa John’s Pizza, Krispy Kreme, gyms and carwashes. He even owns a minority stake in the Sacramento Kings. So it’s no surprise that Shaq is also taking on SPACs alongside one of Martin Luther King Jr.’s sons and three former Disney executives. Their Forest Road Acquisition Corp. (FRX) has announced a merger with Beachbody and MYX Fitness. The company’s first SPAC raised $300 million and included onethird of a warrant with units. Now, Forest Road Acquisition II (FRXBU) seeks to raise $300 million by selling 30 million units. Shaq will serve as the SPAC’s special advisor.

With her 23 Grand Slam singles titles, Serena Williams has set a powerful example for women in sports, and she’s also demonstrating how powerful women can be in the business world. Over the span of five years, Williams has invested in 34 startups and, in April 2019, she announced the creation of Serena Ventures, a firm that invests in companies that embrace diverse leadership, individual empowerment, creativity and opportunity. She was the first athlete to reach the Forbes annual list of the world’s richest self-made women, with an estimated fortune of $225 million. Williams also serves on the board of directors for the SPAC Jaws Spitfire Acquisition (SPFR). The SPAC raised $300 million in an IPO to acquire consumer technology and related technology businesses in Europe and North America, and it recently merged with Velo3D to create a combined company with an enterprise value of $1.6 billion. It is expected to occur in the second half of 2021.

Alexander Enmanuel Rodriguez, nicknamed A-Rod, played shortstop and third base for the New York Yankees and is now an established businessman and philanthropist. He founded A-Rod Corp. in 2004 as an investment firm that backs businesses with internal and external capital and works with championship teams. The firm has invested in more than 30 companies and partnerships valued at more than $1 billion. A-Rod Corp.’s portfolio includes real estate in more than 40 states, gyms, fintech company Acorns, Vita Coco and telemedicine company Hims & Hers. A-Rod and Jennifer Lopez founded JLo Beauty, a skincare company. He’s CEO of a SPAC called Slam Corp. (SLAMU) that invests in startups and other companies. The SPAC plans to raise more than $500 million and sell 50 million units, comprising shares and warrants, priced at $10 each. It seeks acquisitions in sports, media, entertainment, health and wellness, and consumer technology.

PHOTOGRAPHS: (JAY-Z, WILLIAMS, RODRIGUEZ) SHUTTERSTOCK.COM; (O’NEAL) KYLE TERADA-USA TODAY SPORTS

Star Power

Celebrities from the worlds of sports, entertainment and

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PHOTOGRAPHS: (BEANE) DARREN YAMASHITA-USA TODAY SPORTS; (PALIHAPITIYA) REUTERS/BRENDAN MCDERMID/FILE PHOTO; (ACKMAN) REUTERS/RICHARD BRIAN; (WILSON) SHUTTERSTOCK.COM

BILLY BEA NE

CHAMAT H PALI H A P I T I YA

BILL AC K MA N

CI ARA W I LSON

Michael Lewis’ bestselling book Moneyball: The Art of Winning an Unfair Game made Billy Beane famous for his work as executive vice president of the Oakland Athletics. Now Beane’s working with a SPAC named RedBird Acquisition Corp. (RBAC) to acquire companies involved with sports, media and data analytics with a specific target of professional sports franchises. Last year, it raised $500 million but failed tocomplete a merger with the Boston Red Sox earlier this year. It was seeking a 20% to 25% stake in Fenway Sports Group at an $8 billion valuation, but the deal didn’t come together because of difficulties in obtaining outside financing. Now, RedBird and basketball great LeBron James are set to purchase stakes in the Red Sox totaling 12%. Majority owner John Henry has agreed to sell about 11% to RedBird and 1% to James.

Chamath Palihapitiya, a Canadian-American venture capitalist, software engineer and CEO of Social Capital, has also made a name for himself in SPACs. He’s been involved in 12 of them and has launched six of his own. Of the six, three have completed deals, one has a pending merger and two are still searching for targets. On average, the 12 SPAC deals produced a return of 47% for shareholders in 2020. The average lifetime gain for the 12 is 137%. Along with his own six SPACs, Palihapitiya has funded eight SPAC deals, including Virgin Galactic (SPCE), Opendoor Technologies (OPEN), Social Capital Hedosophia Holdings Corp. IV (IPOD), Social Capital Hedosophia Holdings Corp. V (IPOE), Clover Health Investments (CLOV) and Social Capital Hedosophia Holdings Corp. VI (IPOF). In March, he sold his shares in Virgin Galactic without warning public investors. He had promoted the company to investors by putting $100 million of his own money into the business to demonstrate his commitment to the company.

Although Bill Ackman hasn’t made a name for himself in sports or the arts, he’s become well-known as an investor and hedge fund manager. He’s the CEO of the $13 billion hedge fund Pershing Square Capital Management, which he started in 2004 with $54 million from his personal funds and former business partner Leucadia National. Last year, Pershing Square Holdings, the hedge fund firm’s publicly traded vehicle, posted its best year ever, returning 70.2%, far outpacing the broader market. The fund was up 5.9% year-to-date when Luckbox went to press. The SPAC Pershing Square Tontine Holdings (PSTH) was founded last year and has $4 billion on its balance sheet, plus $1 billion it is allowed to invest in a target company. The SPAC has yet to acquire a company, but its stock price is ticking up steadily—shares are up more than 50% from their offering price last July.

Multi-talented singer, songwriter, dancer and model Ciara Wilson is yet another artist on the long list of names associated with SPACs. She serves as director for Bright Lights Acquisition (BLTS), run by the former Dick Clark Productions. The SPAC plans to acquire and take public a company in consumer products, media, entertainment or sports valued at $500 million to $1.5 billion. Once the company is identified, the SPAC plans to bring in a celebrity who would be a good fit, emulating arrangements like those of Ryan Reynolds and Aviation American Gin, Oprah Winfrey and Weight Watchers, Dr. Dre and Beats Electronics, and Shaquille O’Neal and Papa John’s Pizza. Ciara has made one personal investment with Cloud Paper, a tree-free paper products company. She and her husband, quarterback for the Seattle Seahawks Russell Wilson, are investing approximately $1.75 million to rebrand the Cascade Midway Academy and open a high school called Why Not You Academy.

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THE ISSUE WITH SPACs

The King of SPACs Doug Ellenoff, the founder of one of America’s leading SPAC law firms, explains the wildly popular investment vehicle. BY GARRETT BALDWIN

The conversation was edited lightly for style and brevity.

Let’s start with your business. What’s a law firm’s due diligence process with a SPAC? How do you evaluate prospective clients?

It’s an easy conversation in the SPAC market because you’re attracting established financial players in the private equity or venture world, or executives of significant private or public companies. It doesn’t require a lot of diligence. It’s a bit more complicated when the deals are international and we have to consider the team. SPACs have become popular even though a stigma was attached to them just 10 or 15 years ago. What’s made SPACs mainstream?

Let me first say I don’t believe the stigma of SPACs is over. We’re certainly in a better place. But if the private companies that went public in the last eight months fall on hard times, I’m confident those who are predisposed to dislike SPACs will point fingers again. It’s a default reflex to find fault in SPACs. The growth of SPACs didn’t happen overnight with Virgin Galactic or Bill Ackman or DraftKings. It was the hard work of lawyers, accountants, investment bankers and principals who iterated the program coming into 2020. Those successes—with fewer failures in a bull market—admittedly led to a dissipation of the concern and negativity that regulators and law firms had put out in the early years. When Virgin Galactic and then Bill Ackman had success, those who had been monitoring the program with skepticism started scratching their heads and thinking “I don’t understand why people were saying such negative things about SPACs.” Is Bill Ackman’s decision to waive the 20% SPAC sponsor fee important to the shift in perception?

PHOTOGRAPH: COURTESY DOUG ELLENOFF

To understand the substantial value of SPACs, or special-purpose acquisition companies, Luckbox ignored the noise and went straight to the source—the law firm of Ellenoff Grossman & Schole. For 25 years, the attorneys there have specialized in SPACs, initial public offerings (IPOs), registered direct/private investment public equity (PIPEs) and reverse mergers. In the last decade, the firm has engaged in nearly 40% of all new SPACs. It led the SPAC IPO Legal League Tables for 2020 and ranked No. 1 of 17 firms in terms of deal flow. In 2020 alone, the firm worked on 70 SPACs. It has completed at least 325 SPACs over 18 years. So, they know what they’re talking about. In this interview, Doug Ellenoff, a founding member of the firm, discusses the misconceptions that cloud the public’s understanding of SPACs, the market incentives that drive investment capital into private vehicles and the factors that make SPACs a favorable strategy for investors.

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Not in the slightest. It makes for an interesting narrative, but nobody’s followed suit. I think that’s telling. Is there margin pressure on that fee?

It’s not whether or not it’s appropriate to ask for 20% upfront, fully disclosed. What is being debated at the time of the pricing of the PIPE and the acquisition, legitimately, are the economic realities of SPACs being satisfied to the degree that the sponsor should get to hold onto the entirety of the 20%. I don’t have a problem with Bill Ackman’s structure. He’s not novel if you go back a decade ago when Goldman first tried to come to the market with a deal and had a unique structure. Before that, we had other structures. People will tinker around the edges to make this statement of greater harmony of interest among the sponsors, targets and investors. That’s a positive objective. You said it’s a default reflex to find fault with SPACs. Financial media tend to oversimplify everything: SPACs are good, SPACs are bad, it’s a bubble. Does this vehicle get fair treatment?

The media played into the hands of the narrative of the early 2000s. At the time, many people didn’t have an interest in the

A Private Investment in Public Equity (PIPE) enables a stock issuer to raise capital by selling shares in a public company below its current market value.

program. These people weren’t concerned with giving an honest appraisal. The media followed their lead. If you look at every article between 2000 and 2010, most start with negativity and concern. What’s the top SPAC misconception among investors and the media?

Most people don’t understand how SPAC business combinations get consummated. And I don’t know how people write about SPACs and fail to understand the redemption clause. Would you walk us through that consummation process?

Sure. If I raised $250 million, I am now on the hunt. I find a private, pre-revenue company. Maybe it’s in biotech or tech. I want to do a deal with that entity. That $250 million that I raised is still subject to redemption. I say to the target that the $250 million is subject to redemption, but I want to help de-risk the transaction. We both know the deal will get done. We sign a letter of intent with valuation terms and the amount of cash the target company requires. In short order, we market a confidentially marketed PIPE— not to retail investors, but institutional investors—the most sophisticated portfolio managers at the largest U.S. institutions. Then we say to them, “Do you like this deal? Do you like the valuation? Are you willing to put up capital to help de-risk this transaction?” They then provide their

opinion. This does not involve an amorphous group of investors. It involves managers who understand EVs (electric vehicles) or biotech companies and portfolio managers who typically have experience in these companies. Once they say they’re in in enough volume, then the transaction proceeds through the diligence process, which is IPO-like, and whether or not that’s business, legal or financial due diligence. Then we sign all the documentation. And that’s all still confidential. Then we publicly announce it. Once we publicly announce it, if the stock goes up, investors still have the right of redemption up until closing after the shareholder vote. They can redeem. They can vote. If the stock goes up, there’s no incentive for them to redeem. They could just sell into the open market and take the profits. Why do SPACs exist?

When I started practicing law 30-plus years ago, there were 10,000 publicly traded companies in the U.S. That number’s been cut in half. Why? More intentionally designed disincentives to be public. How is that a good societal policy? Now, the thesis was that we don’t want risky companies in the market. Where’ve they gone? They went to venture capital. Markets don’t stop. They mutate. So, you had more private equity firms, more venture capital firms and thousands of portfolio companies in the private markets.

Leading SPAC law firms Ellenoff Grossman & Schole oversaw more special-purpose acquistion company deals last year than any other law firm. Source: SPACinsider and SPACresearch.com

Counsel

2021 Deal Count (Total)

2020 Deal Count (Total)

Volume ($MM)

Avg Size ($MM)

% Share

Ellenoff Grossman & Schole

20,073.9

260.7

10.35%

Kirkland & Ellis

23,553.4

351.5

12.14%

Skadden, Arps, Slate, Meagher & Flom

20,880.4

360.0

10.77%

White & Case

19,209.9

362.5

9.91%

Davis Polk & Wardwell

18,942.2

394.6

9.77%

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THE ISSUE WITH SPACs

Are you concerned about SPACs that double or even go to $60 before a deal announcement?

How can I not be? That creates other regulatory concerns. I never want as a professional to feel someone is taking advantage of retail investors. It’s not my DNA, but we have a federal system that says as long as you have access to full and fair disclosure, which they do, they can make an informed investment decision. It’s also not my client’s responsibility to do a brokerage firm’s work and ensure they’re properly helping clients. How are celebrities influencing these deals?

My basic feeling is, like all sponsors, you need a range of competencies and expertise. It’s not akin to somebody launching a digital asset and slapping some celebrity’s name on it just to create awareness. There’s substance under the hood here for each of these professional athletes. We’re trying to incent private companies to do business with us. And the value proposition, when it works, is I’m not just going to go to any SPAC as the lowest-cost way and means to get public. But I want to do business with people who can advance my opportunity in a way that I can’t. What advice would you give investors who are considering SPACs?

The SPAC market has facilitated the creation of many new investment opportunities that—depending on an investor’s risk profile and appetite—may or may not be appropriate for a portion of their portfolio. That’s recognizing that portfolio theory does not suggest overweighting

W HEN I STARTED P RACT ICI N G LAW 30P LUS YEARS AGO, T HER E WERE 10,000 PU B LIC LY TRADED CO M PANI ES I N TH E U.S. T HAT NUMBER’S BEEN CU T IN HALF. WH Y ? M O R E IN TEN TI ON ALLY DES IG NED DIS INC EN TI VES TO BE PU B LIC.

riskier growth opportunities—whether that’s a SPAC or otherwise—disproportionately as a portion of their portfolio. As I’ve said, I’m fine with what’s going on now, so long as people who study it recognize that the stock market has proven an appetite for private equity deals and venture deals. And the mechanism itself is agnostic—it’s what investors want. That’s what people should be focusing on. Why is it that there’s such a desperate scramble to find interesting opportunities in the public markets? Investors can’t access the same sort of opportunities they want to support in the private markets. What question should people ask instead of getting lost in a conversation about the supposed SPAC bubble?

Partners in Ellenoff Grossman & Schole celebrate the the SPAC law firm’s 25th anniversary by ringing the NASDAQ opening bell on July 14, 2017. They are (lfrom left) Allen Schole, Douglas Ellenoff and Barry Grossman,

“Why is the stock market useful?” Assuming that there’s a positive answer for that, why isn’t there a conversation around what we do to improve it? If there is a need to improve it, there are always programs that develop slowly over time. Just like the introduction of the PIPE as the permanent capital funding mechanism for the business combination post-2012 is how we got there. And the SPAC market is responding to the ills of other means of finance. It should be embraced and encouraged, as opposed to potentially stigmatized and derided.

PHOTOGRAPH: COURTESY DOUG ELLENOFF; CHRISTOPHER GALLUZZO/NASDAQ, INC.

Today, we have larger IPOs but fewer of them. Our thesis has always been that the SPAC market enables qualified sponsors who understand the public markets and industries, and are equally capable of identifying interesting companies or opportunities to take public.

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Modern_T

PHOTOGRAPH: COURTESY DOUG ELLENOFF; CHRISTOPHER GALLUZZO/NASDAQ, INC.

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THE ISSUE WITH SPACs

A Six-Pack with Mark Yusko An institutional investor answers six questions on SPACs BY GARRETT BALDWIN

ark Yusko founded Morgan Creek Capital and now serves as the firm’s CEO and chief investment officer. In February, the company teamed with Exos Financial to create the Morgan Creek-Exos SPAC Originated ETF (SPXZ). The ETF offers broad access to investing in blank check companies. To complement this issue’s focus on the surge in special-purpose acquisition companies, or SPACs, and to dispel some of the surrounding media-driven misinformation, Yusko provided his thought-provoking takes on the industry. On SPAC innovation Yusko maintained that SPACs bring forward venture capital and democratize the opportunity for investors to take part in early-stage companies. “Historically, regulations limited access to venture capital wealth solely to the super-rich,” he said. “If you weren’t an accredited investor or qualified purchaser, you were prohibited by law from investing in venture capitals.” SPACs make it possible for everyone to take part in the process. SPAC growth Not a single SPAC had to liquidate last year, a monumental event for the financial sector that Yusko traced to a rule change in 2015. “Regulators figured out that by not allowing companies to make forward-looking statements by requiring an operating history and profits, you

were restricting new companies,” he said. Before the change, companies remained private longer, a benefit to venture capitalists. Today, companies no longer need forward-looking statements or operating profits to go public. Companies of the future A “company of the future” is one “where the best days are ahead of it,” Yusko maintained. Today, his firm operates in five industries: space travel and tourism, electrification of vehicles, autonomy, esports, and online gaming. All of those industries have a future that’s better than the past, he said. Although he doesn’t plan to travel to space himself, he noted that many people will do so. Meanwhile, online gaming and gambling are growing, he continued, citing ESPN’s adoption of live broadcasting of odds as an example of the trend. He also predicted a boom in autonomous robotic taxis. SPAC structure Asked if he focuses on the managers or the deal when selecting companies to fund, Yusko invoked the metaphor of betting on the jockey or the horse. He believes he’s betting on the jockeys (or managers) because the horse is good. “All the horses are thoroughbreds because the SPAC structure is superior as a means to go public for high-growth, innovative companies,” he said, noting once again that

SPACS A R E T H E PE R F ECT I N VEST M ENT V EHIC LE B ECAUS E TH EY O F F E R PROT ECT I O N S BEFO R E A DEAL CO M M ENC ES.

because SPACs provide superior investment structures, everyone has a “good horse.” Celebrity SPACs Yusko views every deal as an opportunity but sometimes hesitates when the sponsors are celebrities. He believes those groups are typically “late adopters” in the SPAC business, and he prefers trailblazers with strong operating teams, venture capitalists and private equity investors. Why SPACs? SPACs are the perfect investment vehicle because they offer protections before a deal commences, Yusko maintained. One of the biggest misconceptions about SPACs centers on sponsor compensation, he said. “For a SPAC, I have to put up real capital, and if we don’t do a deal, I lose it. It’s gone,” he continued. “That’s a different alignment of interests than what people understand.” Most believe sponsors just get paid and walk away rich, but he noted that sponsors lose money if they don’t complete a deal. Sponsors also lose money if they make a bad deal. But if they complete a good deal, they can make a lot of money. “If you do good and you add value, then there should be an exponential growth curve,” he said. “To me, that’s the power of the SPAC model.”

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But in general, the media’s skepticism of SPACs has continued unabated. It’s even becoming deeper as prominent citizens lend their names to the investment vehicles.

Media Coverage of SPACs Some financial journalists can’t be bothered with telling the true stor y of complex investment structures BY GARRETT BALDWIN

rint journalists and television talking heads seem plenty worried about SPACs, the special-purpose acquisition companies formed to acquire private companies and take them public. They agonize over a perceived bubble and fret about valuations they deem too high. Have they seen Tesla’s P/E? They also talk endlessly about having the wrong celebrities at the helm—even if they’re not really at the helm. But there’s nothing new here. SPACs have been weighed down with unfounded negative perceptions for decades—long before Facebook and Twitter were even invented. And the bad rap has become so entrenched that it isn’t ending anytime soon. Harvard Business School analyzed media perception of reverse mergers between 2001 and 2012 found that out of 267 articles, 113 were negative and 148 were neutral. Just six were positive. A case in point Take the example of some overly tired Wall Street junior bankers. They may have found themselves in a state of fatigue because of

their heavy workload, the restrictions caused by the pandemic or the uncertainties of the political climate. But CNBC pointed the finger at the SPAC frenzy. Was there any truth to that assessment? Well, Goldman Sachs analysts studied the situation and pulled together PowerPoint presentations tracing burnout to 100-hour workweeks and bosses who didn’t listen to reason. In fact, none of the respondents to a Goldman survey on working conditions mentioned SPACs as a problem. The firm’s technology, media and telecom team was already heavily engaged in merger and acquisition activity before the SPAC boom. Just the same, other media outlets appear to have unquestioningly picked up the CNBC conclusion that SPACs were the culprit for burnout and reused the mistaken factoid without attribution. Fortunately, not everyone fell into that trap. Vice Media covered the Goldman survey without mentioning SPACs and headlined the story this way: Working at Goldman Sachs Suuuucks, Leaked Internal Survey Shows.

Celebrity SPACs When well-known figures from the worlds of sports or entertainment attach themselves to SPACs, the media often fail to look below the surface. Sometimes the celebrity connections serve as mere window dressing, but occasionally the stars bring financial acumen to the deal. The New York Times, for example, published an article about Shaquille O’Neal’s participation in Forest Road Acquisition Corp. but failed to mention the former NBA star’s extensive business experience—or his MBA and his doctorate in education. O’Neal has even earned the praise of SPAC expert Doug Ellenoff for serving on the board of Papa John’s Pizza. Moreover, some reporters seem to scoff at the very idea of celebrity SPACs. In February, Matt Egan, a highly regarded financial journalist, wrote an article called, Celebs including A-Rod and Ciara are getting into SPACs. What could go wrong? But the contempt for celebrity-related SPACs seemed like part of Egan’s disdain for SPACs in general. Negativity prevails In his article on celebrity SPACs, Egan quoted Yale professor Jonathan Macey, who said, “With a SPAC, it’s like you have a captain, and the captain is telling you he will buy a ship and then figure out where it will go.” Egan wrote about the need for investor diligence and noted the massive amount of money pouring into SPACs. He reminded readers that markets are ruled by emotion and not rationality, which is the essence of behavioral finance. Late in the article, he finally mentioned that what matters with SPACs is having management teams that know how to write business plans and take companies public. But his article lacked any insight into the guardrails and advantages of SPACs, which include the IPO vote, arbitrage, warrants, the redemption potential and the capacity to eliminate risk (see p. 16). There’s no good reason for fear-mongering about SPACs. Give the participants the details, and let the market decide.

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BOOK VALUE

The Serendipity Mindset Luck? It’s all in your head. By Ed McKinley

PHOTOGRAPH: THOMAS BARSTAD ECKHOFF, COURTESY OF CHRISTIAN BUSCH

n his book The Serendipity Mindset: The Art and Science of Creating Good Luck, author Christian Busch differentiates between what he calls blind luck and smart luck. Some people find themselves blessed with blind luck, like the good fortune of being born into a prosperous family. Others work to achieve smart luck by recognizing and combining valuable opportunities and then acting upon them— what Busch calls “connecting the dots.” Busch, who teaches at New York University and the London School of Economics, had been thinking about serendipity long before he wrote the book. “What I found fascinating is that this kind of positive coincidence seems to pop up everywhere,” he told Luckbox. “So I had this curiosity about it.” For a while, he simply talked about serendipity with friends. But then a bolt of lightning struck. He suddenly realized serendipity could serve as the guiding principle for his next book about the future of business. “So that’s how the book came about—as a serendipitous moment in itself,” Busch recalled. “My whole journey, in a way, has been serendipitous encounters working off of other serendipitous encounters.”

A mindset For some people, serendipity doesn’t just happen. Many of the world’s most joyful and successful people cultivate the serendipity mindset. Think of it as a philosophy of life that anyone can adopt. It requires opening oneself to the unexpected, casting aside preconceptions and envisioning connections among seemingly unrelated

elements. It’s a shift from passive acceptance of events to actively shaping outcomes. Busch provided the example of a California entrepreneur who found himself stranded in London when a volcanic eruption in Iceland grounded flights throughout Europe. Knowing some of his peers were also marooned, he organized a conference that attracted

Author Christian Busch takes to the lecturn to share his ideas on inviting serendipity into every interaction and creating opportunities for good luck.

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200 attendees. Some 10,000 viewers watched the livestream. And he accomplished that over a weekend with no budget. Faced with something random and unexpected, the entrepreneur had responded by capitalizing on his connections with businesspeople and organizations to create something positive, Busch noted, adding that things come together in seemingly unexpected ways more often than people realize. In fact,

EMBRACING THE UNEXPECTED People miss the opportunity for serendipity by underestimating the power of the unexpected, according to author Christian Busch. He uses the “birthday paradox” to illustrate his point. “In a room of 23 people, we have a 50% probability of two people having the same birthday, which is crazy, right?” Busch said. Hasty problem-solving leads some to divide 365 by 23, arriving at what appears to be a low probability of two people having the same birthday. But the situation’s actually exponential. The first person in the room has 22 people who might have the same birthday, but so does the second person, the third, etc. With 60 in a room, it’s common to have two or three pairs, Busch noted. In a room with 70 people, it’s almost impossible not to have two with the same birthday, he said. “That puts things into perspective,” Busch said. “We miss serendipity all the time because we think it’s not there.”

Busch finds so many examples of serendipity that he can categorize them. Serendipity’s subsets Busch identifies three types of serendipity and endows them with memorable names. He calls them Archimedes Serendipity, Post-It Note Serendipity and Thunderbolt Serendipity. Archimedes Serendipity occurs when someone studies a problem but finds the solution in an unexpected way. “You have a destination in mind, but the way you get there changes,” Busch said in the book. The classic case occurred when Archimedes, the Greek mathematician, was trying to figure out whether a crown was cast in silver or gold. The crown weighed the right amount, but would have to be larger if it contained silver, which weighs less than gold. While visiting a public bath, Archimedes saw the water spill over the sides of a tub as he entered, and suddenly realized that if two crowns weighed the same amount, the silver crown’s greater bulk would displace more water than the gold crown’s smaller bulk. Problem solved. The second type of serendipity is named for the ubiquitous Post-It sticky notes that adorn the partitions

of so many office cubicles. It occurs when someone studies one problem but solves another one. “Your journey goes off into a completely different direction but still gets you to a destination you like,” Busch wrote. In the namesake example, researchers at 3M were trying to develop a strong glue but accidentally formulated one that proved relatively weak. Still, the new adhesive found a home because it worked perfectly on Post-Its. The third type, Thunderbolt Serendipity, strikes when it’s least expected because the beneficiary suddenly hits upon the solution to a problem that wasn’t even under consideration. Busch’s own experience with being struck by the idea to make serendipity the subject of his book serves as an example. Although the categories help explain serendipity, Busch warns against overemphasizing them. Some serendipitous events defy categorization, while others blend the categories. In any event, dwelling on the categories can stymie serendipity by distracting from connecting the dots. Extracting the positive Even unpleasant events can become useful cogs in the mechanism of the serendipity mindset, according to

The idea that people can create serendipity— a set of fortuitous coincidences—goes a long way toward explaining what’s right in the world.

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PHOTOGRAPHS: (OBAMA) REUTERS/JOSHUA ROBERTS/FILE PHOTO; (JOBS, POLMAN) WIKIPEDIA; (WASMUND) SHAA.COM; (BANGA) REUTERS/EDUARDO MUNOZ

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Busch. He tells the tale of someone who spilled a latte on a fellow patron at a coffee shop. The person who caused the mishap could apologize and leave. Or the spiller could engage the victim in conversation and perhaps meet someone who becomes a business partner or the love of a lifetime. So, it would seem that eventually everyone would take up the serendipity mindset. But serendipitors can meet resistance. They operate in a different way from the masses who revere planning and treasure control—even if that control’s merely an illusion. People often delude themselves into thinking that random events were part of their plan all along. Busch harbors other ideas for conducting society. “Let’s validate the lifestyle of people who have an approximate plan, but who are also actually open to the unexpected and who mostly serendipitously create their own luck and luck for others,” he advised. One of his goals with the book has been to convince CEOs and their board members to become more honest about the randomness of events and less protective of the facade of control they maintain to raise their status in the eyes of others. Informed by hindsight, people make up stories that turn a string of luck into a seemingly wellplanned series of reaching goals. “Let’s let serendipitors tell their stories in real ways rather than the ways we’re used to,” Busch urged. It’s a plea that’s resonated for read-

ers. Since finishing the book, Busch has been contacted by serendipitors who’ve embraced its ideas. “Oh my God!” one reader told him. “You’ve described who I am, but I didn’t have a vocabulary for this.” Creating a vocabulary for serendipity—as Busch did in the book— moves luck from the realm of the passive into the world of active pursuits where people can learn to shape outcomes. For many readers, having the right words to do justice to the “luck” they’ve worked hard to achieve lends credibility to the way they’ve lived their lives.

THE SERENDIPITY HALL OF FAME

Navigating serendipity Busch beseeches readers to build a serendipity “muscle” that takes advantage of the fact that smart luck is a process. Luck results from recognizing and acting upon serendipity “triggers” that can work together to bring about fortuitous coincidence. The result—serendipity—constitutes a major force in the world. In fact, an estimated 30% to 50% of scientific breakthroughs result from the ability to capitalize on happenstance. Discoveries ranging from penicillin to Viagra occurred by accident when scientists were trying to achieve something totally different. To achieve serendipity, begin by seeding every interaction with possible “dots” that can trigger coincidence. For example, one of Busch’s acquaintances was asked what he does. He replied that he’s a technology entrepreneur, has been reading the philosophy of science and really likes to play piano.

Steve Jobs devoted his life to finding the connections between events that most would discount as random and unrelated.

“Developing a serendipity mindset is all about how we frame the world—establishing a core motivation, seeing and connecting the dots, turning them into opportunities and (potentially) accelerating and amplifying them. And always having an eye out for the potential biases that we all have.” —Excerpted from The Serendipity Mindset

Many well-known people qualify as what author Christian Busch would call serendipitors—those who have trained themselves to cultivate and recognize happy coincidences. Former President Barack Obama, for example, recognizes that many of the advantages he gained in life flowed from sprinkling serendipity along the way.

Shaa Wasmund showed such verve when she interviewed a boxer that he asked her to handle his public relations, launching her on a career so successful that she was awarded the MBE—Most Excellent Order of the British Empire— for excellence in the arts and sciences. It was a matter of seizing unexpected good fortune when it presented itself. Paul Polman, former CEO of Unilever, had an unusual sense of direction for the company. He had considered becoming a priest to help people but realized he could help more people by running a huge company ethically. That gave him a great sense of direction and kept him open to the unexpected. Ajay Banga, executive chairman and former CEO of Mastercard, had the big idea of bringing masses of people into the financial system but let the details of accomplishing that unfold in unexpected ways. Banga’s approach doesn’t belong to him alone. In a study of 43 CEOs, researchers found that the traits nearly all shared were a sense of direction and an openness to ways of getting there, Busch said.

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That response provides three possibilities to connect with the other person. It happened that the questioner’s sister was teaching the philosophy of science, and that led to a guest lecture for the acquaintance who had the foresight to lay the groundwork for serendipity. When the dots connect that way, it’s time for tenacity to kick in and carry the serendipitor to good luck through hard work. But what if hardships arise? Serendipitors like Barack Obama have a knack for reframing a crisis as an opportunity, Busch maintained. That can keep one going long after

CREATE YOUR OWN LUCK Luck is a precarious thing. Just ask Bill Gates, Elon Musk or Jeff Bezos how they created vast fortunes. Was it luck? Hard work? Creativity? Opportunity? Risk aversion? Or just plain smarts? Entrepreneurial success often results from some combination of those qualities. However, it starts with understanding that your own actions can increase the number of opportunities that arise. It’s about having a mindset that recognizes opportunity is all around you. But the quest for success doesn’t end there. You need to do something about creating it. It doesn’t just drop into your lap. You need to take action. The probability of “luck” increases when you create opportunities for yourself. How do you do that? You put yourself in a position where you increase interactions. Begin by simply showing up—seeing and being seen. Follow that with the hard work that sparks encounters with the people around you. Share opinions and stay top of mind with coworkers. Remember that interactions don’t occur just in person: In the library or online, research can make you see the world a little differently, opening your eyes to possibilities, creating more “luck.” And the more interactions you create, the more positive outcomes you’ll enjoy. In other words, create your own luck! —Kristi Ross, tastytrade co-CEO

others would have thrown up their hands in desperation, he said, adding that, “If you want a happy ending, you can’t stop the story too early.” Another key to serendipity lies in understanding the other person’s motives. In one example, a spouse’s complaints about where one leaves a toothbrush could actually reflect a feeling of being held in disregard because of the failure to move the toothbrush after three requests. In companies, people often talk around a problem or a goal, making it difficult to grasp where the enterprise is headed, Busch continued. “A lot of times there’s ambiguity, and a lot of times we can’t put everything exactly into words,” he said. That’s why Busch advocates using the Socratic method of seeking to ask better questions about underlying assumptions. Asking the question “why” can accomplish a lot, he maintains. After all, everyone involved stands to benefit. “There’s been a big shift towards enlightened self-interest,” Busch noted. “The idea is that the more you can cater to others’ needs, the more others also want to cater to your needs. In more collaborative settings and in a networked world, that is increasingly the case.” That attitude generates good karma and simply feels really good, too, he continued. It even creates an atmosphere where everyone involved deserves the benefits of serendipity, according to Busch.

“If we strive too much for something, we might never achieve it. As with happiness and love, serendipity is not something that can be excessively searched out; rather, it is something we can be ready for—and get in shape for.” —Excerpted from The Serendipity Mindset

Everyday approaches to serendipity Can people simply get up tomorrow morning and begin to court serendipity? In Busch’s view, they can. He recommends keeping a serendipity journal to record good fortune. Begin the diary by writing down principles and describing a life destination. Then incorporate that destination into every conversation to set the stage for coincidence. The journal also helps the diarist recognize moments of serendipity that have occurred. That reveals the underlying patterns that one can repeat to bring on additional serendipitous situations. Journaling also points out missed opportunities for serendipity, like the time an idea popped into the diarist’s head during a meeting but wasn’t spoken out loud and thus never came to fruition. That can uncover patterns that one can break. Fear of rejection, for example, may have blocked the urge to speak up at the meeting, and that’s a problem one can address. In the workplace, teams can hold project funerals to assess what went well and what went wrong. Sometimes, those funerals reveal a new way of thinking about the work that’s been done or a new way forward as the work proceeds. People might prefer to talk about success than failure and thus may shy away from project funerals that dredge up the details of a less-than-successful effort. But discussing what went wrong offers more opportunity for learning than will emerge from the autopsy of a project that succeeded. If the discussion at a project funeral leads to a new way of thinking or a new use for an existing product, observers may view the process as producing a piece of luck. But it’s a case of creating the atmosphere that breeds luck. At meetings, Busch likes to ask questions like, “What surprised you last week? Was there something

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in the data that was unexpected? And why was that the case?” Once again, he’s laying the groundwork for recognizing the right kind of coincidence. At a Chinese company, for example, customers were complaining that the firm’s washing machines were breaking down. Investigation revealed the farmers were using the machines to wash potatoes instead of clothes. That unexpected bit of information could have prompted the company to try to teach the public the purpose of its product. Instead, the company set about creating a machine capable of washing potatoes. “We can teach people to watch out for the unexpected because a lot of times innovation comes from those places,” Busch said. Resisting serendipity Many common habits stand in the way of achieving serendipity, Busch noted. So many people have a tendency to seek order in the face of chaos. Job seekers, for example, often shape a resume into a coherent narrative that chronicles the upward trajectory of a well-defined path to the executive suite. But how often does that kind of resume amount to little more than a rear-guard action to impose structure on a fairly random career, Busch asked. He regards it as “post-rationalizing” that gives the impression the job candidate had more control than was actually the case. Another impediment to serendipity arises with the tendency to hold oneself back from executing on projects. For Busch, that can take the form of the “inner imposter,” the notion that he’s not really good enough for the roles he’s chosen in life. But there’s nothing like serendipity for banishing those negative feelings. After all, serendipity—as Busch lays it out and examines it— goes a long way toward explaining what’s right about the world.

SERENDIPITY PROBABILITY IG Group, a U.K.-based trading platform, has agreed to pay $1.1 billion for tastytrade, the online financial network and brokerage that owns Luckbox magazine. Management will stay in place at both firms. That’s big news here, but it’s not the first huge accomplishment for tastytrade co-CEOs Tom Sosnoff and Kristi Ross. (See opposite page.) In 1999, they helped start the thinkorswim trading platform, which they sold 10 years later to TD Ameritrade for $750 million. What are the chances of launching not one but two stunningly serendipitous successes? For perspective, Luckbox turned to regular contributor Fergus Simpson, a senior researcher at Prowler.io who holds a doctorate in astrophysics from the University of Cambridge. Investors are always on the lookout for the next Facebook, Uber or Twitter—a “unicorn” startup valued at more than $1 billion, Simpson said. Identifying those companies early on is hugely rewarding. But how hard are they to find? And does their rarity live up to their mythical status? Some 233 unicorns are alive and well in the United States at the moment, up 47 in 2020. That might seem like a lot, but their ranks are dwarfed by the huge number of new businesses that crop up each year. If one picked a start-up at random, what are the chances it would ultimately become a fabled unicorn? To answer, compare the number of startups that emerge each year with the number of unicorns that appear each year. Back in 2013, when the term “unicorn” was coined, the odds were longer than one in a million. It’s tricky to appreciate the magnitude, so it’s useful to describe long odds in terms of rolling dice. Here, it’s equivalent to the chance of throwing eight dice and ending up with eight sixes. Try it at home, but be forewarned: Even when re-rolling nonstop every couple of seconds, it would usually take more than a month to achieve that perfect set of eight sixes. But one never knows—it could come up on the first try. That’s what investors hope. These days, unicorns have become more prevalent than in 2013, meaning that throwing six dice would be the new equivalent.

Many of the world’s most joyful and successful people cultivate a serendipity mindset.

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“Our minds respond to a stimulus—such as a sound or an image—by looking for a familiar pattern or for an identity we know. Often we find one when none is there—a phenomenon known as ‘pareidolia.’ People have heard indistinct voices in the whir of fans or air conditioners, they have interpreted hidden messages in music played backwards or at slower-thannormal speeds, and some see faces of animals in cloud formations. We all recognize this tendency in ourselves when it comes to visual images. But, in fact, it goes deeper. The larger phenomenon behind this is called ‘apophenia,’ our tendency to attribute meaning to patterns or perceived connections that are unrelated. One of the most intriguing examples of this comes from an experiment carried out by behavioral psychologist B. F. Skinner. In Skinner’s experiment, a hungry pigeon was placed inside a box. Then food pellets were released into the box at entirely random

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intervals. Obviously, the pigeon had no way of predicting when the pellets dropped, and no way of causing it. But the pigeon began to behave as if it could. If it received a food pellet while performing some kind of action (e.g., walking in a circle, turning its head to one side), it then started repeating that action it had performed before, until the next pellet appeared. The pattern in which pellets were falling was entirely random, but the pigeon began acting as if it was a predictable event over which it could exercise some control. This matters for serendipity because our tendency to seek recognizable patterns can obscure the significance of random events. It can even lead us to creating rigid formulas for success when there is no real underlying mechanism to support them. Put bluntly, if we air-brush serendipity out of our history, we make it far harder to spot it when it happens again. This is particularly important given that serendipity is a process rather than a

singular event, and it often has a long incubation period. We might not always be willing or able to track it back to the moment it ‘started.’ Instead, we try to make sense out of what just happened and usually tell only half of the story. Or often even a completely different story. Creating a story can be constructive as it helps provide a focus for future progress, but if we are to learn from it, it has to be an honest one, interrogated properly and open to reassessment. That also plays a role in how organizations operate. Take senior executives, who often narrate milestones or decisions as if they were all planned from the beginning in order to satisfy expectations. The CEO of one of the world’s most successful companies told me how this has a lot to do with investors and employees, who might not appreciate him saying, ‘Well, this was luck,’ or, ‘Actually, this was unplanned,’ because it feels dependent and coincidental.” —Excerpted from The Serendipity Mindset

4/9/21 12:42 PM

Talking heads. Their time is up. It’s our time now. Explore your ﬁnancial curiosity. dough.com dough is a registered broker dealer offering self-directed brokerage services. *regulatory & other fees apply. member FINRA/SIPC. ©2020 dough.

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THE NORMAL DEVIATE

Volatile SPACs: Welcome As low-cap stocks, SPACs have built-in volatility. That’s a good thing. By Tom Preston

uring the past year, special purpose acquisition companies (SPACs) have grown in popularity, not only because they finance companies but also because they offer opportunities for options traders. For the former, SPACs reduce regulatory hassle and speed up the availability of new products and ideas to investors. For the latter, SPACs offer volatility, and volatility creates opportunity by raising the prices of options. Traders are gravitating toward SPACs for specific reasons. Higher options prices mean higher potential profits for traders who short them, and options on SPACs tend to have higher prices given SPACs’ higher volatility, even when volatility is lower across the broader market. And SPACs’ volatility is built into them as very low-cap stocks. Take SPACs like Virgin Galac-

tic (SPCE), whose options have a 109% implied volatility (IV), Nikola (NKLA), with a 108% IV, Foley Trasimene (BFT), with a 110% IV, or XL Fleet (XL), with a 134% IV. On their faces, those SPACs are technology companies to one degree or another, and technology stocks tend to have higher volatility. At the same time, though, other tech stocks like Apple (AAPL) had a 34% IV, Microsoft (MSFT) had a 27% IV, Amazon (AMZN) had a 29% IV and Alphabet (GOOGL) had a 28% IV. But tech stocks aren’t equal. The mega-cap stocks, like Apple, Microsoft, Amazon and Alphabet, have more reliable cash flows and business models. They’ve been around a long time. The market is more confident in their prospects than it is of a SPAC launched less than a year ago. That uncertainty of their future cash flows is part of why SPACs’ volatili-

With higher volatility, the probability of the stock reaching those far out-of-themoney strikes is higher.

ties are much higher. An old theory in finance promulgated by Eugene Fama and Ken French that helps explain what we see with SPAC IV is that the riskier an asset is, the cheaper it is. A stock has a low market cap because the market considers it riskier than a stock with a higher market cap. And when a stock with a low capitalization has options, those options tend to have higher IV to reflect the market’s perception of risk. Sure enough, the market capitalizations of these SPACs are relatively small. Virgin Galactic’s market cap is $7.7 billion, Nikola’s is $6.4 billion, Foley Trasimene’s is $2.9 billion and XL Feet’s is $1.5 billion. Apple’s market cap is $2.06 trillion, Microsoft’s is $1.78 trillion, Amazon’s is $1.56 trillion and Alphabet’s is $1.37 trillion. They’re 1,000x larger than the SPACs, but their options have lower IVs and thus present less opportunity than options on SPACs. In trading, volatility’s job is to tell investors the potential magnitude of a stock’s future price changes. The higher the volatility, the larger the potential price changes. For example, there’s a higher probability of a 5% price change up or down in a stock with higher volatility than in a stock with lower volatility. The lower-volatility stock could have a 5% price change, but it’s just less likely. What SPACs’ high IV is telling traders is that the market expects these stocks to have large price changes and potentially wide trading ranges. That, in turn, increases the options prices of further out-of-the-money strikes.

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If stock price changes are randomly distributed over a normal distribution curve, higher volatility makes that normal curve wider and flatter. That means a data point—a stock price change in this case—on the far right-hand side or far lefthand side of the curve has a higher probability of occurring. Options’ strike prices are above or below the current stock price. Place the strikes on the normal distribution curve with the current stock price at the mean, and it’s easy to see there’s a lower probability of the stock price reaching the strikes that are farther away from the stock price. The farther away the strike price, the less likely it is that the stock price will have a price change large enough to reach it. But with higher volatility, the probability of the stock reaching those far

out-of-the-money strikes is higher, and thus their option prices are higher, too. Take a stock like Virgin Galactic with a volatility of 105%. At the time this article was written, it was trading for $32, and the 25 put with 64 days to expiration was trading at $2.20. If the IV of that put were closer to the 30% IV of the options on mega-cap tech stocks, that 25 put’s value would be closer to $0.03. That’s 1/73rd of the Virgin Galactic put’s actual value. An options seller willing to take the risk of trading options on Virgin Galactic would be rewarded with a max profit of $220 versus $3. The benefits of shorting options at higher prices are that their potential profits are higher, their breakeven points are farther away from the stock price, they have a higher probability of making 50% of their max profit and they have higher positive theta.

Further, even though clearing firms can set higher margin requiements for SPAC options with their higher IVs, their max profit versus their margin requirement is higher than for options with lower IVs. That short 25 put in Virgin Galactic had a margin requirement of about $1,700. Divide the $220 credit for shorting the put by the margin and get about 12.9% maximum return on capital. Do that for a stock with 30% IV and standard margin requirement and one would get about 1.2% maximum return on capital. That’s why even though SPACs with higher volatility can be riskier, they are welcomed in the marketplace. Tom Preston, Luckbox features editor, is the purveyor of all things probability-based and the poster boy for a standard normal deviate. @fittypercent

Listen Here Truth or Skepticism

Tom Sosnoff, entrepreneur, options trader and co-CEO of tastytrade, joins Dylan Ratigan, businessman, author and former host of MSNBC’s The Dylan Ratigan Show, for a weekly podcast covering everything from sports and investing to politics and monetary policy. One’s an iconoclast, and the other’s a contrarian. Tune in each week find out who is who. It’s unscripted and unpretentious—some like to think of it as rants, but refined.

The Prediction Trade

If you can trade it, or bet on it, you can bet they will talk about it on The Prediction Trade—the only podcast for gamblers, traders, investors, math freaks, data geeks and superforecasters devoted to the intersection of probability, prediction and profit. Each episode features expert guests with proprietary forecasting models and insights into the outcomes of prediction market events. So whether you live to bet or bet to live, check out the next episode of The Prediction Trade.

Truth or Skepticism and The Prediction Trade are available on your favorite podcast platform.

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THE PREDICTION TRADE

The Cost of Overconfidence Hubris erects a barrier to good forecasting. Unchecked, it could prove expensive. By Warren Hatch

ith SPACs all the rage, it’s important not to get too carried away by the rhetoric. Overconfidence can be expensive. This is true in geopolitics, public health or the stock market. From the 1961 Bay of Pigs debacle to the slow response to the COVID19 crisis, to millions of dollars lost speculating in the markets, history is filled with costly examples. And yet, our culture continues to overvalue bold statements. Time and time again, the media turn to pundits who speak with conviction despite their spotty track records when it comes to offering real foresight. Think back to a year ago, when the airwaves were filled with experts and politicians confidently asserting that COVID-19 would swiftly pass. President Trump claimed in February 2020 that the coronavirus was under control and would disappear “like a miracle.” It took another month for the administration to acknowledge the severity of the unfolding pandemic. Fox-like forecasting “A confident yes or no is satisfying in a way that maybe never is, a fact that helps to explain why the media so often turn to hedgehogs who are sure they know what is coming no matter how bad their forecasting records may be,” writes Good Judgment’s co-founder Philip Tetlock in his book with Dan Gardner, Super-

forecasting: The Art and Science of Prediction. Tetlock refers to a distinction between “foxes” and “hedgehogs,” a metaphor borrowed from ancient Greek poetry and popularized by the philosopher Isaiah Berlin: “The fox knows many things but the hedgehog knows one big thing.” Hedgehogs tend to be more confident—and more likely to get media attention—but, as researchers have found in multiple experiments, they also tend to be worse forecasters. Foxes, in contrast, tend to think in terms of “however” and “on the other hand.” They switch mental gears and talk about probabilities instead of certainties. For instance, last year Good Judgment’s Superforecasters were estimating with a 67% probability that worldwide cases of COVID-19 would exceed 53 million within a year, and a 99% probability that deaths in the United States alone would be more than 200,000—a figure many found inordinate at the time. The Superforecasters proved right in both cases. Their judgment was, and continues to be, well-calibrated. In other words, they know what they know and know what they don’t know, and they make their forecasts accordingly.

and past success, they seek out evidence that those hunches may be wrong. They embrace new information and are not afraid to change their mind in light of new evidence. Alas, pundits and most of the media have yet to join the foxes. “We live in a world that rewards those who speak with conviction— even when that is misplaced—and gives very little airtime to those who acknowledge doubt,” writes Financial Times columnist Jemima Kelly. The sense of security that comes with confident judgments is comforting. But it is an illusion. The cost of that illusion can be steep: from the inadequate early response to the pandemic to the investors trading to their detriment because they are overconfident about their ability to predict stock market returns. Superforecasters know a way to avoid that cost: In a world that overvalues hedgehogs, pay more attention to your inner fox. Warren Hatch, a former Wall Street investor, is CEO of Good Judgment Inc., a commercial enterprise that provides forecasts and forecasting training based on the expertise and research of the Good Judgment Project. @wfrhatch

Tune in to The Prediction Trade podcast from Luckbox for all-new ways to make money forecasting the financial markets, politics, crypto, sports and other events.

Instead of relying on hunches, seek evidence that those hunches may be wrong.

Banishing overconfidence To avoid overconfidence, Superforecasters consider worst-case scenarios. Instead of relying on hunches

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REASON’S EDGE

The Education of New Speculators Don’t confuse healthy speculation with desperation By Dylan Ratigan

hink back to the world before 2016. A world before COVID-19. A world where Donald Trump had yet to enter his first primary. Non-fungible tokens (NFTs) were in their infancy and special purpose acquisition companies (SPACs) seemed boring. GameStop wasn’t an investment vehicle but instead just a crappy little store selling video games. Can you picture it? I can’t. That’s because the whirlwind of the past five years has changed everything. We’ve been stretched so far and dizzied so profoundly that we don’t remember how to appreciate a little calm, a little downtime, a little slack. But now the noise of politics is abating. In some ways, the 24-7 news cycle is becoming boring. Trump has exited center stage. Big pharma is pushing out vaccines, enabling us to at least flirt with a sense of normality. Economically, we averted the worst potential scenario in large part because of stimulus checks. The irony might be that those same stimulus checks are morphing slack into sloppy investments, thereby creating the next existential crisis. Irrational exuberance I’ve been in this business for 25 years, largely observing and reporting. I’ve seen bubbles. I recognize irrational exuberance. But in my adult life, I have never seen a more toppy market, which means it’s unsustainable. SPACs aren’t a panacea for wealth disparity. They’re just a way to raise money. NFTs are not even a real thing! GameStop is not an $11 billion company! But when there’s slack in the system, along with an insatiable appetite for alpha and central banks handing out cash, we get sloppy. We chase and assign unsustainable valuations that are destined to fall, leading to economic collapse, more federal bailouts and an oppor-

tunity to make the same mistakes all over again. People, a little slack is OK. If your jeans are a little loose, you don’t have to binge eat. If no good movies are showing, read a book instead of seeing a remake of a bad movie. And if you have a little extra money you want to put to work, you don’t have to force it into something you don’t understand. Don’t get sloppy with a little slack. Desperate speculation Don’t get me wrong, speculation is healthy. It’s necessary. It’s fundamental to capitalism because without it, no prospective business would have access to the financing required to get an idea off the ground. Speculation is betting on someone or something because you believe their product or service meets a need people are willing to spend their hard-earned money to buy. But what happens when there are no good ideas? There’s a difference between abundant opportunity speculation and desperation speculation. Opportunity speculation happens when the marketplace is flooded with good ideas, so money is aggressively spread out and diversified across a spectrum of potential. Desperate speculation is what happens when common sense and reason lose out to greed and conclusions predicated on false syllogisms. It’s easy to get caught up in the mania, especially when you’re surrounded by friends and family making quick money. Mom buys a SPAC and triples her money. Dad buys a meme stock, quadrupling his money. And grandma? Well, she bought bitcoin at $1,000, just divorced grandpa and is now dating someone younger than you. You want a little of that. You might even believe you deserve some of that. But before you pull the trigger on something you don’t

“SKEPTICISM IS THE FIRST STEP TOWARD TRUTH.” ― Denis Diderot, 16th century French philosopher

understand, ask yourself one simple question: Can you explain what you’re buying in just one sentence? If the answer is no, maybe hold off a second. Whether they’re SPACs, NFTs, meme stocks, cryptocurrencies or whatever comes next, there is always a pool of people willing to throw money at an idea. Some of those ideas are great. They will pay off far more than anyone ever expected. They may even become defining moments for you. However, most don’t pan out, and that’s why maintaining some discretion in speculating is the difference between successful investing and panhandling in a subway station. If you don’t know what you’re ordering off the menu, you might find something new you like. Or you might be throwing away $50. If you’re speculating because there are so many good ideas out there and you hope to be part of one, great. But if you’re speculating because it’s what everyone else is doing and you’re just desperate to be one of the cool kids, well, you might want to begin scoping out high-traffic subway stops. Dylan Ratigan, veteran CNBC and MSNBC commentator and best-selling author of Greedy Bastards, serves as tastytrade global market strategist and cohost of the Truth or Skepticism podcast. @dylanratigan

Luckbox | May 2021

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TRADER 1. Family photo 1

2. A print by San Francisco muralist Amos Goldbaum

3. Bloomberg Professional terminal 4. Jabra headset for virtual calls and meetings

5. Notebook for brainstorming and keeping a trade log 6. TradingView charts for technical analysis and tracking real-time market action 7. Blue Yeti microphone

ILYA SPIVAK Head Asian-Pacific Strategist at DailyFX Home/Office location San Francisco Age 38 Years trading 15 How did you start trading? I graduated with dual undergraduate degrees in economics and international relations, wanting to pursue some sort of hands-on macro research or analysis. I was also stubbornly dead set on staying in San Francisco. After almost a year of going to interviews for places I really didn’t want to work, I came across an ad for an entry-level sales job at the new San Francisco branch of a Wall Street FX broker. It opened with something like, “Do you love to talk about international events, markets and politics?” That was definitely me. I figured I’d try to get my foot in the door through sales and see if I could find my way to the analytical side of things from there. At the interview, I was

8. Status Audio Between Pro wireless earbuds

handed an article from The Economist that I was supposed to read and answer questions about on the spot. As it happened, I’d already read it because I subscribed to the magazine, and said as much. That seemed to go over well, and after a bit of deliberation they hired me. I fell in love with trading in the first few months on that sales desk. The ability to practically participate in everything I’d studied in school and was passionate about was almost instantly appealing. Favorite trading strategy for what you trade most? I trade from a global macro perspective. I follow global events closely and try to think about what is likely to happen economically and geopolitically from a broad, big-picture perspective in the coming six to 12 months or so. Then I attempt to figure out how the major markets might respond to various permutations of what I think might occur. Usually, I see most benchmark assets—G10 currencies, bonds and stock indexes, as well as key commodities

like gold and crude oil—telling the same macro story through their own lens. Then, I study the charts to gauge how the macro backdrop I envision might look in the context of current trend development. I am looking for price action to suggest that one of the macro scenarios I’ve considered is playing out, and then use technical analysis to find where a trading opportunity with attractive risk and reward parameters could be. Average number of trades per day? I might have as many as five or six trades on at a given time, or none at all. I tend to hold positions for weeks and months at a time, so there is no true daily average. I am not necessarily looking to trade on any given day, whether it be to open or close a position. What percentage of your outcomes do you attribute to luck? Everything I have learned over the years suggests it’s critical to get the influence of luck in trading outcomes as close to 0% as possible, for

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both winning and losing bets. In my experience, successful traders follow a well-defined system where they can clearly explain what their entry and exit parameters are and thereby demonstrate why they took a given trade, whether it made them money or lost it. That doesn’t mean I can foretell what will happen all of the time, not by a long shot. Rather, I try to define rules that say, “If price does X or goes to Y level for whatever reason, this is what my response should be.” This way, even my losses are hopefully within the strategy’s parameters. That makes learning from my mistakes and adjusting the approach accordingly much easier. There might be some pure luck here and there—like getting a good trade fill in difficult market conditions—but this should not impact performance in a meaningful way. Favorite trading moment? I was just getting started on the research side of the forex markets after moving from sales in early 2008. A lot of the talk at that time

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was about “de-coupling,” which meant that the United States would go off and have its mortgage crisis and recession while the rest of the world would continue growing. The U.S. dollar got absolutely shredded and euro/U.S. dollar (EUR/USD) currency pairs poked above 1.60 for the first time. I was convinced that this idea was wrong and searched all over the place for evidence of global contagion. One day it dawned on me that if there were spillover, it might strike Canada relatively early because of its proximity to the United States and sensitivity to its business cycle. Once I figured out that I needed to strip away crude oil exports—which looked as though they were surging because the price of a barrel of crude had skyrocketed thanks to the weak greenback—I giddily found precisely what I was looking for. That convinced me that USD was cheap because the crisis would not be contained, and that it had not been truly priced in. I entered short EUR/USD near 1.5550 in early August and covered below 1.30 toward year-end, almost tripling my account.

FAVORITE TRADING BOOKS This is a dead heat between Market Wizards and Hedge Fund Market Wizards, both by Jack D. Schwager

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TIKTOK DOUGH

Learning the Trade Two Gen Z TikTok influencers are learning the fine art of trading stocks and options from a seasoned pro—and they’re doing it in real time on the tastytrade network

he April issue of Luckbox introduced readers to Kayla Kilbride and Errol Coleman, the beneficiaries of mentoring from legendary trader Tom Sosnoff, coCEO of the tastytrade financial network. Their adventures in navigating the options markets are streaming twice a week on tastytrade.

How has it been so far? Errol Coleman: Well, considering it has only

been a little over a month, my account is up roughly $400, but I am happy to be in the green with a small cushion. Kayla Kilbride: The highlight of my week is the time I spend with Tom and Errol learning how to trade! It has been such an incredible experience learning the tastytrade mechanics. The amount of information felt overwhelming at first, but the more we traded, the more confidence I felt in what we were doing. As of today, all but one of my trades are in the red. But shockingly, it doesn’t phase me because I know statistically, the odds are in my favor. What have you learned? Coleman: I have learned that holding

multiple positions overnight is not that bad, especially if your portfolio is somewhat balanced. Kilbride: I think Errol and I agree that this is a different form of trading than either of us has ever experienced. I thought buying options contracts, in general, was frightening, but selling options was something I would have never even considered before this. It would be impossible to summarize all the little things that I have learned, but my biggest takeaway so far is, “Don’t be afraid of any type of trade—futures, options or crypto. Be diversified and take some risk.” What has been harder to learn than you may have thought?

Coleman: Understanding which indexes or

futures are more suitable for your account size and risk tolerance.

What feedback are you getting from your followers? Kilbride: People on Twitter, specifically,

have been so engaged—it’s hilarious! Some people even message me to let me know when to take profits. And a few people mimic my trades, too, if they like them—or do the reverse to compete. One guy recently tweeted me and said, “Bought and sold Kay’s $X puts from yesterday and made big money.” The position did poorly for me, but I’m glad it worked for him. I love the interactions.

Which instruments or markets do you most enjoying trading? Coleman: Options, because I love how

strategic and creative you can get.

Kilbride: Definitely futures, especially

because it was the type of trade I was most nervous about before the show! I’m three for three on wins.

tastyworks platform). I then look for tickers I’m familiar with and go from there. Any tips for other young traders? Coleman: For any young traders watching

me, I would say not to take any one trade personally. Follow your process, manage your risk and take the next trade. There’s not much you can do after that, and you can’t control what you can’t control. Red trades are not your fault, but how you manage the trade is up to you. Don’t put so much emotional energy into one trade. Look at the bigger picture. Kilbride: Keep watching and learning! It takes time to learn these things, and it can be terribly overwhelming at first. Don’t give up if you feel like things aren’t clicking. Take a break and come back to it. It has been fourand-a-half months since I started learning about the stock market. I cannot believe how much I have learned simply by dedicating a few hours a week to these concepts. Thank you, Tom, and tastytrade!

What was your biggest mistake? Coleman: My biggest mistake was probably

buying into strength.

Kilbride: My biggest mistake was when

I decided to run along with the popular opinion and placed a bullish skewed iron condor on ARKK (the Ark Innovation ETF). It was one of my first trades and has yet to recover.

What are you looking at right now and why? Kilbride: I was trained to start by looking

at specific companies that I liked, but that has changed a bit with the way we trade with Tom. I have turned my attention to stocks that have made big recent moves with high options volume and a good amount of liquidity (which can be found really easily in the “high options volume” preset on the

For more from Kilbride and Coleman, watch The Two Yutes, a Luckbox Presents show on the tastytrade network. Catch it live Mondays and Fridays at 1:30 p.m. Central.

Luckbox | May 2021

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CALENDAR

MAY

1 III Points x Secret Project Festival Miami 1 The Kentucky Derby Louisville, KY

4 Star Wars Day

5 Mid-Atlantic Institutional Investor Forum Washington, D.C.

9 Mother’s Day

12-13 Big Tech in Finance Virtual

15 World Whisky Day

4-27 Consensus by CoinDesk 2 Virtual 24-26 Global Technology, Media and Communications Conference Virtual 30 Indianapolis 500 Indianapolis Motor Speedway

31 Memorial Day

III Points x Secret Project Festival In March, Miami attracted visitors in the tens of thousands when officials lifted most COVID-19 restrictions and allowed the reopening of restaurants, bars and clubs. Crowds flocked to the beaches and loitered in the streets. Fights broke out and gunshots caused human stampedes. Police arrested more than 1,000 revelers, and the city declared a state of emergency. Nonetheless, Miami is scheduled to host the outdoor III Points x Secret Project Festival April 30-May 1. The music festival will unfold on two stages, but the number of attendees will be limited, and CDC guidelines will be in effect. The Kentucky Derby The Kentucky Derby is scheduled for May, but attendance will be limited to 20,000 to 30,000—about 40% to 50% of capacity at Churchill Downs. Fans must purchase tickets in advance if they hope to watch the race in person while tossing back a mint julep. Last year, the NBC broadcast of the event saw a decline in viewers with 9.8 million watching the race, compared with 18.5 million in 2019. Last year’s race drew a total betting handle of $79.4 million, down 52% from the record $165.5 million in bets placed in 2019. Indianapolis 500 The 105th running of the Indianapolis 500 is returning to its usual Memorial Day weekend time slot and will welcome at least a few fans to the stands. But it remains unclear exactly how many will be allowed to attend. As usual, 33 drivers will endeavor to run 200 laps to finish the 500-mile race and enjoy the winner’s traditional cold bottle of milk. Last year’s race was postponed until August and held with virtually no spectators. Speedway officials plan to announce details soon on crowd size, ticket purchases and COVID-related restrictions. The absence of ticket sales last year depleted the track’s earning by at least $20 million, which led to reducing the purse from $15 million to $7.5 million. Last year’s race winner, Takuma Sato, took home $1.37 million. This year’s purse has yet to be announced.

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BASIC

YOLO Fever

147%

the recent rise in the Churchill SPAC stock

Buy stock in multiple companies to increase the chance of picking a winner and lessen the pain of choosing a loser

-5%

the recent decline in the Pershing Square SPAC stock

By Michael Gough

n the past few months, “YOLO” has become a common refrain among many new investors. “You only live once” trades typically involve an investor going all-in on one stock and hoping for the best. But that’s not really trading or investing—it’s more like gambling. It can prove profitable at times, and it’s fun if it’s working but it’s not sustainable. It is a strategy designed to fail. Instead, traders can—and should— diversify their portfolios, which enables them to capitalize on profitable opportunities while simultaneously reducing the risk of picking the wrong stock. The recent explosion of special-purpose acquisition companies, or SPACs, provides an excellent case study on how to diversify. Some of the SPACs launched on public markets in recent months have skyrocketed, while others have fallen flat. So, rather than trying to pick the SPAC, investors can instead invest in several, diversify their exposure and increase their chances of buying an outperformer. While financial advisors use the term “diversification” to explain why a portfolio needs a certain stock-bond allocation, it’s also a viable strategy for anyone looking to catch the next big move.

Consider an investor looking for SPAC exposure back in January and trying to decide between two of the most liquid: Churchill Capital Corp. (CCIV) and Pershing Square Tontine Holdings (PSTH). Armed with today’s knowledge, the investor would have purchased Churchill and enjoyed a return of 147% by mid-March. Meanwhile, Pershing Square declined 5%. But without clairvoyance, it would have been impossible to determine which was worth buying. Let’s consider how the investment might have turned out if the trader decided not to make a choice and simply purchased both. Doing so would have improved the chance of picking the winning stock and collecting a positive return. If the investor had used 50% of his funds to purchase Churchill and 50% to buy Pershing Square, the portfolio would have yielded 69% over the previously described period. That’s not as great as 147%, but it’s certainly better than -5%. That’s just one example of how diversifying can help create a more balanced portfolio. If the investor were more bullish on one stock over the other, he could have fine-tuned the exposure. The table shows the

Proceeding with caution Investors who divided their holdings between Churchill and Pershing Square fared better than anyone who went all-in on Pershing Square. Portfolio

Cumulative Percent Return

100% CCIV

147%

100% PSTH

-5%

50% CCIV and 50% PSTH

69%

75% CCIV and 25% PSTH

110%

25% CCIV and 75% PSTH

30%

performance of various portfolio allocations, any of which would have yielded a higher return than simply buying Pershing Square. So, instead of investing everything in a single strategy, traders may want to consider diversifying with multiple holdings to increase the likelihood of picking a winning stock and spreading the risk. Michael Gough enjoys retail trading and writing code. He works in business and product development at the Small Exchange, building index-based futures and professional partnerships. @small_exchange

Some of the SPACs launched in recent months have skyrocketed while others have fallen flat.

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t s t

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Cheat Sheet #14

Rem o and ve s this ave page !

Four Pillars of Options These four elements can provide the key to successful investing. By Michael Hart

n statistics, the law of large numbers says that as the sample size grows, outcomes will more closely resemble the expected probabilities. Flip a coin 10 times, and it may come up heads 80% of the time. Flip a coin 10,000 times, and the outcome will be much closer to the expected probability of 50%. The same applies to options trading strategies: They all begin with and are a function of the likelihood of an outcome generated by many occurrences. For those strategies, traders need a repeatable method. In other words, the math of many occurrences creates the environment for trading strategies—the “shell of the trade.” When choosing a trade, identify the probability of success by using established mechanics rooted in mathematics and derived statistics. That way, traders can identify trades that fit their tolerance for risk. This Cheat Sheet covers the four elements of the shell of a trade that provide the keys to success: liquidity, IV rank, duration and delta. It’s all in the math and the power of large numbers. Mike Hart, a former floor trader at the Chicago Stock Exchange and a proprietary futures trader, specializes in energy markets and interest rates. He’s a contributing member of the tastytrade research team. @mikehart79

LIQUIDITY

This is the most vital metric. To assess liquidity, based on the “bid-ask spread,” subtract the ask price from the bid price. If it’s less than 20 cents, consider the trade liquid, but if it’s more than 20 cents, it may be illiquid. The liquidity star meter on the tastyworks platform provides another way to judge liquidity. With three or four stars, the trade passes the liquidity test; fewer than three stars indicates the need for caution.

IV RANK

This metric, which measures price volatility, determines what strategies traders deploy. When it’s high (more than 20%), they sell volatility. When it’s low (below 20%), they consider long volatility strategies.

Before making a trade, we need first to verify liquidity. To do this, we consider these factors: Star Meter

Bid/Ask Spread Star Meter on tastyworks

At-the-money bid

At-the-money ask

Less than $1.20

-$.20 (liquid)

More than $1.20

+$0.20 (illiquid)

Spread

IV Rank

Action

Possible Strategies

Over 20%

Sell for a Credit

Strangle, Iron Condor

Under 20%

Buy for a Debit

Diagonal, Calendar

DURATION

After considering IV rank, check the duration of the available contracts that expire within the desired period. Traders can maximize profits made from time decay by selling premium between 30 and 60 days. They avoid trades that don’t fit their time criteria. As an option gets closer to expiration, the value associated with time moves toward zero. That’s known as theta decay. Studies have demonstrated that the value lost daily—or what’s called the velocity of decay—is not constant. The option begins to lose value at a greater rate between 30 to 60 days to expiration.

DELTA

It all comes together with the use of delta, which measures the potential impact of a move by the underlying and the trade’s overall exposure. The delta value determines direction and probability. It’s easy to determine both when Probability of Direction Based selecting the strike. When setting up possible Delta Level Expiring OTM on Delta options trades, look first at the 16-delta level, or Short 16 one standard deviation. Use that as a starting 84% Bearish Delta Call point and adjust risk and credit accordingly.

May 2021 | Luckbox

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ADVANCED

Calculating Correlation Here’s how to compute the relationship between two stocks without having to leave home. By Michael Rechenthin, Ph.D.

arket correlation helps traders understand the relationship between two stocks or indexes. A table filled with information on the subject (right) should help explain the phenomenon. Traders can use readily available data to calculate the correlation of any combination. For a better understanding of the process, Luckbox invites readers to watch a video on the calculation. (See the icon in the upper righthand corner of the page for access to the video.) The video explains the steps for creating calculations for the S&P 500 ETF (SPY) and the Nasdaq 100 ETF (QQQ). Try it with any combination of stocks.

Calculate a portfolio’s correlation with this DIY video

tastytrade.com/ diycorrelations

Become a correlation maven Correlations are among the most important metrics for self-directed investors. Correlation Range

Measure

How can traders use this?

+0.80 to +1.00

Strong Positive Correlation

QQQ and SPY have a correlation of 0.88. They have a tendency to move in the same direction.

+0.30 to +0.80

Weak Positive Correlation

XLU and SPY have a correlation of 0.47. They move in the same direction, but not always.

-0.30 to +0.30

Little to No Correlation

TLT and SPY have a correlation of 0.08, nearly zero. Statistically, they are not highly correlated.

-0.80 to -0.30

Weak Negative Correlation

TLT and XLF have a correlation of -0.40. They move in opposite directions, but not always.

-1.00 to -0.80

Strong Negative Correlation

SPY and VIX have a correlation of -0.82. So when the market sells off, expect volatility to increase.

Looking for a new way to invest for the long haul? LEARN ABOUT THE SMALLS AT: TASTYWORKS.COM/TRADETHESMALLS tastyworks, Inc. is a member of NFA and an affiliate of Small Exchange, Inc. Futures trading is not suitable for all investors due to the inherent risks involved. Read all Futures Risk Disclosures on tastyworks.com/disclosures. © 2020 Small Exchange, Inc.

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trades actionable trading ideas

CHERRY PICKS

R I PE & J U I CY T RADE IDEAS

For Moonshots, Avoid ETFs $600,000 $600,000

$500,000

$502,287

$500,000

other hand, bought $1,000 worth of stock 20 years ago in$400,000 each of the same three companies. But at the end of each year, Investor $300,000 2 rebalanced the portfolio to distribute one-third of $600,000 its value among those three stocks. $200,000 That’s the way many ETFs work. Today, Investor 1 has an account $500,000 $100,000 Investor 2’s worth $463,000, while account is worth $60,000—even though both accounts held Apple $400,000 $for the entire 20 years. ETFs mimic Investor 2’s $300,000 approach. At the end of every quarter or year, they generally rebalance to reduce risk. But gaining $200,000 diversification can cause underperformance. In the previous example, Investor 2 is selling shares$100,000 of the strong performer, Apple, to buy more shares of Coca-Cola and Exxon $Mobile, which aren’t performing as well. It’s a classic case of rewarding underperformance. But that’s what ETFs often do. So they’re great for traders who shy away from “putting all their eggs in one basket,” but they’re less than ideal for those who want to “take the shot.” Traders invest in SPACs or initial public offerings (IPOs) with the hope they’ll achieve stellar performance, right? So, why invest in a SPAC ETF that prizes diversification that might lead to underperformance?

$462,839

$400,000

Rebalancing act Exchange-traded funds reduce risk by rebalancing, but that can $300,000 deflate the upside if the ETF picks a stock with a meteoric rise. $600,000 $200,000 $162,705 $162,705

$100,000 $500,000

$151,584

$107,400 $102,271

$151,584

$112,444

Non-Diversified Investor 1 $300,000

$462,839

2020

2019

2018

2017

2016

2015

2014

2020 2014

2020 2013

2019 2013

2019 2012

2018 2012

2018 2011

Non-Diversified Investor 1 Diversified Investor 2

2017 2010

2016 2010

2016 2009

2015 2009

2015 2008

2014 2008

2014 2007

2013 2007

2013 2006

2012 2005

2011 2005

2011 2004

2010 2004

2010 2003

2009 2003

2009 2002

2008 2002

2008 2001

2007 2000

2007

2006

2005

2004

2003

2002

2001

2000

$502,287

$107,400 $102,271 $112,444

Diversified Investor 2 $279,798

$279,798

$200,000 $162,705

$100,000

$112,444

$162,705 $151,584 $107,400 $102,271

$151,584

$112,444

Non-Diversified Investor 1

Non-Diversified Investor 1 Diversified Investor 2

Diversified Investor 2

What can investors do differently? They can peruse the prospectus of each of the three SPAC ETFs and consider their merits and pitfalls. Don’t let the ETF managers reward the lame stocks at the expense of the highflyers! Michael Rechenthin, Ph.D. (Dr. Data) heads research and data science at tastytrade. @mrechenthin

May 2021 | Luckbox

4/9/21 12:15 PM

2020

2019

2018

2017

2016

2015

2006 2000 2007 2001 2007 2001 2008 2002 2008 2002 2008 2003 2009 2003 2009 2003 2010 2004 2010 2004 2010 2005 2011 2005 2011 2005 2012 2006 2012 2006 2013 2007 2013 2007 2013 2008 2014 2008 2014 2008 2015 2009 2015 2009 2015 2010 2016 2010 2016 2010 2017 2011 2017 2011 2018 2012 2018 2012 2018 2013 2019 2013 2019 2013 2020 2014 2020 2014 2020 2015

2006

2005

2004

2003

2002

2001

$107,400 $102,271 $60 $74,733 $79,115 $55,6 $49,247 $60,073 $74,733 $79,115 $55,633 $57,552 $49,247 $33,505 $31,431 $33,771 $39,337 $36,445 $46,131 $57,552 $39,337 $27,066 $30,342 $20,771 $24,085 $36,445 $31,431 $30,342 $16,123 $33,505 $16,587 $33,771 $46,131 $27,066 $30,838 $29,795 $24,085 $10,016 $10,859 $5,608 $8,031 $3,309 $20,771 $16,123 $16,587 $3,000 $3,150 $10,859 $2,597 $30,838 $29,795 $10,016 $14,055 $11,620 $13,962 $3,000 $3,150 $2,597 $3,309 $5,608 $8,031 $3,000 $3,150 $14,055 $2,487 $3,213 $6,192 $$11,620 $13,962 $3,000 $3,150 $2,487 $3,213 $6,192

Traders dream of picking a single stock that moves from $1,000 to $100,000.

2105-trades-cherrypicks.indd 51

$279,798

$502,287 $60,073 $74,733 $79,115 $55,633 $49,247 $57,552 $33,505 $31,431 $33,771 $39,337 $36,445 $46,131 $462,839 $60,073 $24,085 $27,066 $30,342 $74,733 $79,115 $55,633 $20,771 $16,123 $10,859 $16,587 $49,247 $30,838 $29,795 $5,608 $8,031 $10,016 $39,337 $3,000 $3,150 $2,597 $3,309$57,552 $36,445 $13,962 $30,342 $33,505 $14,055 $31,431 $33,771 $11,620 $27,066 $46,131$6,192 $24,085 $3,000 $3,150 $2,487 $16,587 $3,213 $20,771 $$16,123 $30,838 $29,795 $10,016 $10,859 $400,000 $3,000 $3,150 $2,597 $3,309 $5,608 $8,031 $14,055 $11,620 $13,962 $3,000 $3,150 $2,487 $3,213 $6,192

2000

ometimes traders strain to achieve a “moonshot.” They dream of picking a single stock that quickly moves from $1,000 to $100,000. But they shouldn’t expect that to happen with a special-purpose acquisition company exchange-traded fund, or SPAC ETF. Three such funds are available during the current SPAC craze: the SPAC and New Issue ETF (SPCX), Defiance Next Gen SPAC-Derived ETF (SPAK) and Morgan Creek Exos SPAC Strategy ETF (SPXZ). But they’re unlikely to launch a moon rocket because ETFs diversify to avoid having all of their assets in a handful of stocks. If they pick a stock that has a dramatic increase in value, most of it will be “rebalanced away.” Take the case of Apple (AAPL). Apple stock worth $1,000 about 20 years ago is now valued at $459,000. Not bad. Now, take two investors. Each begins with the same amount of stock in Apple, but Investor 1 holds onto assets for the long term, while Investor 2 trades the way an ETF would. The specifics: Twenty years ago, “non-diversified” Investor 1 bought $1,000 worth of stock in Apple, CocaCola (KO) and Exxon Mobil (XOM). After that, he didn’t touch the account. “Diversified” Investor 2, on the

$502,287

2018

By Mike Rechenthin

trades

FOREX

F R E E- F LOAT I N G I N S I GH TS FRO M G LO BAL CU R R ENCY T RADERS

Inoculating the World Against Recession By Ilya Spivak

he COVID-19 pandemic plunged the world into deep recession as nations retreated into lockdown to contain the viral spread. But monetary and fiscal officials responded to the crisis swiftly and powerfully, based on the collective wisdom they gained during the 2008 global financial crisis and its aftermath. This time, world leaders took bold action to avoid a sluggish recovery. The Federal Reserve Bank slashed its policy rate to 0% and quashed early signs of credit market stress with open-ended quantitative easing. It supplemented those actions with an assortment of targeted lending facilities and a pivot to average inflation targeting. That allows policymakers to tolerate periods of inflation above the target 2% following spells of undershooting and thereby to remove stimulus more slowly once a rebound is afoot. Other top central banks followed suit, slashing benchmark interest rates and introducing a host of non-standard easing schemes, from asset purchases injecting liquidity into markets and repo operations capitalizing banks to yield curve

control regimes capping bond rates. Still, the U.S. dollar is the dominant transactional currency worldwide, so the Fed’s effort was most crucial. A similar story can be told on the fiscal side. Most governments loosened their purse strings to some degree, but the United States has done the most. Congress spent a whopping $4 trillion on stimulus before Joe Biden took office as president, and his administration has pushed through another $1.9 trillion in spending. That puts the total at a staggering 25% of GDP in 2019, the year preceding the COVID-19 outbreak. The scale and speed of the response outstrip the actions of 2008. The Fed grew its balance sheet by $3.6 trillion over the nearly seven years between August 2008 and February 2015. It added an analogous $3.3 trillion in just 12 months this time around, from February 2020 to 2021. The fiscal response to COVID-19 has dwarfed that of the Great Recession by about 2.5 times in the United States. For some countries, the difference has been nearly 10-fold in share-ofGDP terms.

It’s not wholly unreasonable to think spending will not revive runaway inflation. Nevertheless, financial markets are demonstrably concerned that this time will be different. 52

$5.9

trillion U.S. pandemic stimulus spending

5.6%

Expected growth of world GDP for 2021

A successful stimulus On balance, the stimulus efforts have delivered. The JPMorgan Global Composite PMI gauge of economic activity calculates the pace of expansion in the manufacturing and services sectors as the fastest since mid-2018, before the U.S.-China trade war started to take hold but after the Trump administration’s behemoth tax cut juiced performance in the world’s largest economy. Economists expect world GDP to add 5.6% this year, the biggest rise in decades. Policymakers appear ready to keep the pedal to the metal. In the United States in particular, Team Biden plans an ambitious agenda calling for big-splash spending— like $2 trillion on green energy in his first term, for example—while the Fed has emphatically signaled that tightening is nowhere in sight. This seems to be informed by another lesson from the post-2008 recovery: Hefty stimulus will not revive runaway inflation. Wrong about inflation? This lack of fear about inflation is not wholly unreasonable. Data from the International Monetary Fund shows price growth has steadily declined since the mid-1990s, with the global Consumer Price Index settling on a narrow range, averaging a relatively benign 4% during the past 20 years. The Great Recession marked a brief hiccup rather than a structural departure from that norm. Nevertheless, financial markets are

Luckbox | May 2021

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trades

demonstrably concerned that this time will be different. Tellingly, the five-year breakeven rate—a measure of medium-term price growth expectations derived from the spread between nominal and inflation-adjusted bond yields—now sits at its highest point since 2007. Borrowing costs have mounted a spirited rally against this backdrop, while anti-fiat gold prices have trended lower, signaling that investors are worried about a sudden about-face from the Fed that meaningfully brings forward the timeline for stimulus withdrawal. That makes sense. The fiscal boost on offer now surpasses that of the prior crisis by a long mile, while the flood of central bank liquidity has arrived far more quickly than before. Accelerating vaccination and easing

restrictions it portends promise to unleash a flood of pent-up demand that didn’t occur in the wake of the 2008-2009 downturn. A built-in price premium reflecting lingering friction along the critical U.S.China leg of the global supply chain remains. Inflation bets boost yields What all of this means for foreign-exchange markets seems relatively straightforward. A repricing of U.S. monetary policy bets away from the dovish edge of the spectrum appears likely to bode well for the recently battered U.S. dollar. It was trading at a two-year low as recently as late February as firming risk appetite meant traders prized returns over liquidity. Gains may be most pronounced against currencies

where an ultra-dovish policy bias was built-in before the COVID-19 outbreak and thus appears likely to remain, like the euro. Indeed, the European Central Bank had already pushed its target lending rate into negative territory and launched assorted non-standard easing programs when the pandemic struck. The Eurozone has also fared worse than other major economic areas since the virus appeared. While the United States and China have returned to growth, economic activity in the currency bloc continues to contract. EUR/USD has pointedly recoiled from chart resistance against this backdrop. Deeper losses may follow. Ilya Spivak is head strategist for AsiaPacific markets at DailyFX, the research arm of retail trading platform IG. @ilyaspivak

HOOKED ON THE MARKETS?

Visit DailyFX.com for continuous updates on global markets in currencies, commodities, and stock indices.

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CRYPTO CURRENTLY

T H E STAT E O F C RYPTO CU R R ENC IES AND DEC ENT RALIZED FINAN CE

Time to Short Bitcoin? Check These 3 Signals By Mark Helfman

The Puell Multiple The Puell Multiple compares the price of a newly mined bitcoin with the average market value of all mined bitcoins over a given period of time. When the Puell Multiple gets high, miners tend to reduce their holdings. Some feel compelled to sell for local currency that they can invest in their operations, while others simply want to realize immediate profits. Invariably, bitcoin bull markets end when the Puell Multiple hits extreme levels.

When 1,000% returns seem mundane, a small advantage means a lot. 54

Puell Multiple Daily value of newly mined bitcoins (in U.S. dollars) is compared with the 365-day moving average of daily issued value. Extreme readings suggest market cycle peaks.

Puell Multiple

$100,000

BTC Price

$1,000 $100 $10 1

BTC PRICE (USD)

$10,000

10 PUELL 365 MULTIPLE

iven bitcoin’s high volatility, how do investors know whether an upswing marks the peak of the market or just a “local top” before another leg up? Thanks to the transparency of bitcoin’s blockchain, analysts can see changes in spending behaviors, money entering and leaving exchanges, gains and losses among bitcoin wallets, and other information about what people do with bitcoin. Certain patterns emerge when bitcoin nears its market cycle tops, just before bear markets begin. Three metrics—Puell Multiple, MVRV Z-score and HODL Waves—can help savvy investors see the momentum shift before everybody else does.

$1 $0.1 2012

2014

2016

2018

2020

Source: lookintobitcoin.com

The MVRV Z-Score MVRV Z-score measures the difference between bitcoin’s present price and the average price people paid for it. When the score gets high, people convert bitcoin into other things. Maybe they want to cash out their new fortune. Perhaps they fear the market will crash. For whatever reason, they tend to sell en masse. Every bitcoin bull market has ended with the MVRV Z-score at extreme levels. HODL Waves While the Puell Multiple and MVRV Z-score can reliably signal

market peaks, HODL Waves offer clues about how close or far those market peaks might be. These waves measure strength and conviction among people who have bitcoin but don’t use it. They’re known as “HODLers” in crypto-speak and as “diamond hands” on Reddit. Historically, bitcoin peaks when at least 80% of its market value falls into the hands of short-term HODLers. These people tend to buy less often, purchase smaller amounts and sell more quickly than long-term HODLers. One measure of HODLing—called Realized Cap HODL Waves—splits

Luckbox | May 2021

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trades

Mark Helfman, crypto analyst at Hacker Noon, edits and publishes the Crypto is Easy newsletter at cryptoiseasy.substack. com. His second book, Bitcoin or Bust: Wall Street’s Entry Into Cryptocurrency, reached No. 2 on Amazon. @mkhelfman

The MVRV Z-Score measures bitcoin’s market value compared with its realized value. Extreme readings suggest market cycle peaks. Realized Cap

Market Cap

Z-Score 10

1,000,000 100,000

10,000

MVRV Z-SCORE

Behavior as data MVRV Z-score and the Puell Multiple both measure human behaviors and impute all of the movements of bitcoin from all entities. When they both hit their peaks at the same time, bitcoin hits its peak, too. At the same time, HODL Waves confirm the strong hands have sold nearly all of their bitcoin to people with weak hands who will eagerly sell the price drops or when prices go too high, too fast. As a result, bitcoins flood the market and overwhelm buyers. That’s happened only four times in bitcoin’s history: June 2011, April 2013, November 2013 and December 2017. Each time, bitcoin’s price dropped at least 67% in the month afterward, leading to one bear market that lasted six months and three bear markets that lasted longer than two years. For an asset where big crashes are the norm and every boom seems to go parabolic, this data tells investors when to exit or accumulate. With 1,000% returns seemingly mundane over the course of a full bull market and 80% losses standard for each bear market, even small advantages can mean the difference between a big loss and a massive windfall.

MVRV Z-Score

USD (MILIONS)

HODLers into bands that represent time frames, as shown on the chart. The top bands represent the value of bitcoin in the hands of long-term HODLers, while the bottom bands represent the value of bitcoin in the hands of short-term HODLers. While bitcoin’s price ebbs and flows, HODL Waves show clear spikes in short-term HODLers shortly before large corrections. Bitcoin’s bull markets end soon after those spikes go above 80%.

1,000 100

10 2

1 0.1

0 2012

2014

2016

2018

2020

Source: lookintobitcoin.com

Realized Cap HODL Waves This bundle of all active supply age bands, aka HODL Waves, is weighted by the realized price of each bitcoin. Colored bands show the value of bitcoins that were last moved within the time period. $100K $60K

100

$20K $8K $4K

$1K $600 $200 $80 $40

$10 $6

$2 $0.80 $0.40

$0.10K $0.06K $0.02K

0 2011

2012

AGE BANDS >10 y 7-10 y

2013

5-7 y 3-5 y

2014

2-3 y 1-2 y

2015

2016

6-12 m 3-6 m

2017

2018

1-3 m 1w-1m

2019

1 d-1 w 24 h

2020

2021

Price (USD)

Source: Glassnode

May 2021 | 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

Special-Purpose ETFs By James Blakeway

espite the tragic events of the pandemic, many fortunate households have struggled with only one issue: boredom. Working or studying from home, financially stable Americans baked sourdough, flocked to TikTok and hunted down new PlayStations or Xboxes. But people soon tired of Fortnite and Call of Duty. And with their wallets lined with stimulus cash, many took to the financial markets for the first time. Fueled by Reddit’s WallStreetBets message board, chaos broke out in frenzied trading of stocks such as GameStop (GME) and AMC Theaters (AMC). But as the excitement waned, new market participants joined longtime Wall Streeters in turning their sights to the SPAC market. Special-purpose acquisition companies, or SPACs, aren’t a COVID-era innovation, but they’re an increasingly popular way for firms to go public. Unlike the Redditdriven stocks, SPACs provide a bit of sustainable opportunity for investments, instead of just erratic volatility. These “blank check companies,” as they’re sometimes known, compete to find cutting-edge companies that are pioneering technology in a variety of sectors. That leaves investors with difficult choices. Do they purchase SPACs when they’re still a blank check with no specific company as a merger target? Or do they wait

A mixed bag The three new SPAC ETFs differ in structure, philosophy and results. Data as of 3/12/2021

ETF Portfolio Manager

Morgan Creek Capital Management & Exos Asset Management

Tuttle Tactical Management

Defiance ETFs

Ticker

SPXZ

SPCX

SPAK

Management Style

Active

Passive/Index

# of Holdings

137

Expense Ratio

1.00%

0.95%

0.45%

Launch Date

1/26/21

12/16/20

9/30/20

Return since Launch

-5.20%

18.00%

16.40%

S&P 500 Return (same timeframe)

2.20%

6.60%

16.70%

Historical Volatility

45%

25%

46%

until the merger is complete and hope for continued growth in the company, while potentially missing out on the rally spawned by the initial announcement of the merger? ETFs to the rescue Regardless of whether investors buy into the SPAC before or after the merger, narrowing the choice of which stocks to purchase can prove as daunting as any other investment decision. For those looking to reduce analysis paralysis, the exchange-traded fund (ETF) industry once again comes to the rescue, offering investors diversified access to the SPAC market. The markets

already offer three prominent SPAC ETFs—two actively managed funds and one passive. The Tuttle Tactical Management SPAC ETF (SPCX), launched in mid-December, is actively managed and focuses on SPACs still seeking companies to acquire. Investors benefit because the ETF studies blank-check firms, evaluates their management teams and assesses acquisition targets. A little later to the party, Morgan Creek Capital Management (sub-advised by Exos Asset Management) launched its SPAC ETF (SPXZ) in late January. Taking a slightly different approach from

Evaluate any portfolio with Quiet Foundation

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.

Luckbox | May 2021

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Tuttle, it instead focuses on a blend of SPACs. It maintains approximately 66% of its assets in the largest post-merger SPACs from the last several years, while retaining the other 33% to purchase some of the largest pre-merger SPACs. Finally, the Defiance ETFs SPAC fund (SPAK), launched in September 2020, tracks an index of SPACs with no active management. The index, and therefore the ETF, focuses on a 60/40 split between post- and pre-merger SPACs, respectively. Not much history All three ETFs are so new that it’s difficult to assess their performance relative to any benchmark. But investors should remember that these are riskier markets, even in ETF form. Recent volatility for all three funds was above the S&P 500, which is expected given the nature of SPACs and the current market enthusiasm, often met with fast selloffs. That said, the SPAC ETFs offer a lot of internal diversification. Even the Tuttle Tactical fund holds 90 SPACs, more positions than many sector or global ETFs. That reduces the risk of allocating capital to SPACs via these ETFs, enabling investors to gain overall exposure. Another compelling aspect of this diversification is that SPACs span a variety of industries. While they often focus on new technology, these ETFs provide exposure to preand post-merger SPACs in a variety of sub-sectors. More aggressive investors who own specific SPACs, as well as the ETFs, might consider their full exposure if the fund builds a larger position in the same individual name. As with any ETF, diversification isn’t free. The Defiance ETF fund charges the lowest expense ratio (0.45%), which is expected with an index-based fund. Tuttle Tactical (0.95%) and Morgan Creek (1.00%) charge higher expense ratios to cover the costs of actively managed ETFs. These funds incur expenses

Roller coasters? The highly volatile new SPAC ETFs haven’t been around long enough to establish historical benchmarks, but all three outperformed the SPDR S&P 500 ETF Trust in February and fell behind in March.

As the frenzied trading of GameStop and AMC stocks fizzles, investors are turning their attention to specialpurpose acquisition companies, or SPACs.

for research and operations that an index fund avoids. Remain vigilant As with any ETF, investors should be aware of changes in the portfolio and parameters that could have impact down the road. These funds do target certain allocations to pre- and post-merger SPACs, but they also provide caveats in their documentation. The Tuttle Tactical fund, for example, indicates that it could convert all of its assets into shortterm debt securities if market conditions become unfavorable. If that happens, investors who aren’t paying attention would assume they own a SPAC ETF when they’re really holding an overpriced money market fund (that could be losing money). Investors whose interest in the markets was sparked by the recent SPAC hype may be interested in other growth products. Consider the Vanguard Small-Cap Growth ETF (VBK) and the iShares S&P Small-Cap 600 Growth ETF (IJT).

Both outperformed the S&P 500 during the last 10 years and boast expense ratios below 0.2%. While not as flashy as SPACs, these ETFs provide effective low-cost exposure to longer-term growth potential. For investors looking to jump into SPACs but who are unsure of where to start, the SPAC ETFs could provide a diversified addition to an already balanced portfolio. With the current volatility and frenzied attention to the SPAC space, it’s hard to know the longevity of these products, especially given their recent inception. Investors hoping for huge returns will not find them with these ETFs. The expense ratios pay for thorough diversification, not lottery tickets. Whether they choose a SPAC product, be it a pre-merger company, post-merger company or ETF, investors should take the time for research and consistent 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. @jamesblakeway

May 2021 | Luckbox

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trades

THE TECHNICIAN

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

SPACtacular Growth, Mixed Returns By Tim Knight

he “blank check” companies known these days as SPACs, or special-purpose acquisition companies, have enjoyed an astonishing burst of popularity. Check out their growth below, as recorded by spacresearch.com. In other words, from 2014 to 2020, the funds that SPAC offerings raised increased nearly 50-fold. But spectacular growth has brought investors less-than-impressive results. Those who get in early— before the SPAC acquires a target company—have seen their share values spike higher, while the general public gets in later and usually sees their investments wither away.

2014: $1.8 billion by 12 SPAC offerings 2015: $3.9 billion (20) 2016: $3.5 billion (13) 2017: $10.1 billion (34) 2018: $10.7 billion (46) 2019: $13.6 billion (59) 2020: $83.3 billion (248)

ALUS

15.0 14.5 14.0 13.5 13.0 12.5 12.0 11.5 11.0 10.5 10.0 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000

Oct ′20

Nov ′20

Dec ′20

Jan ′21

Feb ′21

APXT

17.5 17.0 16.5 16.0 15.5 15.0 14.5 14.0 13.5 13.0 12.5 12.0 11.5

Source: spacresearch.com

11.0 10.5

30,000,000 20,000,000 10,000,000

Sep ′20

Oct ′20

Nov ′20

Dec ′20

Jan ′21

Feb ′21

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CLII

22 20 18 16 14

10 40,000,000 30,000,000 20,000,000 10,000,000

Nov ′20

Dec ′20

Jan ′21

Feb ′21

GIK

17.0 16.5 16.0 15.5 15.0 14.5 14.0 13.5 13.0 12.5 12.0 11.5 11.0 10.5 10.0

10,000,000 5,000,000

Sep ′20

Oct ′20

Nov ′20

Dec ′20

Jan ′21

Feb ′21

NIPA

Spectacular Flops Hundreds of SPAC company charts are available, and many show essentially the same traits: • When SPACs are still simply financial instruments that haven’t acquired a company, their stock tends to trade at basically its cash value, and with hardly any volume at all because there’s no reason anyone would invest with such an indeterminate future. • Once a company is acquired, the volume of trading surges and the price often pushes higher, based on optimism, enthusiasm and the positive attention raised by the former “shell” of a company merging with a profitseeking enterprise. • Once the proverbial fever has passed, the shares peak and reverse course, often tumbling to almost exactly where they started.

Five examples illustrate this behavior. Fifty such charts could have been offered, but the repetition would not make the point any more clearly. The Outliers Not all SPAC stocks resemble an upside-down letter “V,” but even the better-performing issues don’t have much to recommend them. However, they’re still worth examining because some SPAC stocks do eventually behave like stocks that

22 20 18 16 14 12

10 12,000,000 8,000,000 4,000,000

Aug ′20

Sep ′20

Oct ′20

Nov ′20

Dec ′20

Jan ′21

Feb ′21

50-fold

The increase in SPAC-based funding from 2014 to 2020

400%

How much DraftKings stock rose in two months last year May 2021 | Luckbox

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became public via more traditional routes. Luminar Technologies (LAZR) had a spectacular run-up in late December and early January as it ascended from about $10 to nearly $50. A 19-year-old whiz kid founded the company and received plenty of attention for its technology for self-driving vehicles. As a chart, the Luminar price action hammered out a clean right triangle pattern and looked poised to leap higher, but it broke the supporting trendline of its triangle in February, and the pattern failed. It soon found its price at half its peak value from just weeks earlier. In recent months, companies with anything to do with electric vehicles have attracted investors’ attention because of Tesla’s (TSLA) phenomenal success in the public markets. Lordstown Motors (RIDE) was a SPAC issue that went from about $10 to above $30, similar in style to Luminar, and—also in a similar fashion—sputtered into a fall. The stock made three attempts to get past the $30 level but never did so in a sustainable way. Just like Luminar, it found itself at half its peak price. Another maker of electric cars, Fisker (FSR), has had a better time of it. Its ascent wasn’t as rapid as Lordstown’s, but its descent has not been as severe. The stock seems to have found a firm foundation just above $14, and it briefly doubled from that price in February 2021. The breakdown in Fisker has been

LAZR

44 42 40 38 36 34 32 30 28 26 24 22 20 18 16 14 12

Aug ′20

Sep ′20

Oct ′20

Nov ′20

Dec ′20

Jan ′21

Feb ′21

Mar ′21

RIDE

30 28 26 24 22 20 18 16 14

Mar ′20 Apr ′20 May ′20 Jun ′20 Jul ′20 Aug ′20 Sep ′20 Oct ′20 Nov ′20 Dec ′20 Jan ′21

Feb ′21

FSR

30 28 26 24

Investors who get in early have seen their SPAC share values spike higher, but the general public gets in later and usually sees their investments wither away. 60

22 20 18 16 14 12

May ′20

Jun ′20

Jul ′20

Aug ′20

Sep ′20

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Luckbox | May 2021

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relatively modest compared with other high-flying SPAC stocks. A company featured in the April Luckbox, Virgin Galactic (SPCE), was one of the most successful SPAC offerings. Broadly speaking, the stock has been creating a series of higher highs and higher lows, and it has found relatively strong support at approximately the $28 price level. Of all the stocks examined here, the healthiest looking is DraftKings (DKNG), which over a couple of years has ascended in price by about 600%. More importantly, the increase in price is within the context of a relatively steady and constructive pattern. From late 2019 through March 2020, DraftKings had the same kind of “up then down” failure in price that most SPACs have experienced. In sharp contrast to most SPACs, however, the company began to climb steadily in price, pushing past its former high. Most of its gains took place in just two months—April and May of 2020—when it gained about 400% in price. Then, after creating a saucer pattern, it went on to construct a right triangle pattern, from which it pushed to a lifetime high. The behavior has been somewhat capricious, but it’s a virtual superstar compared with its SPAC brethren. Run, don’t walk The performance of SPAC stocks overall should give investors pause. More often than not, the principal beneficiaries of these financial instruments have been the very early investors and the private companies the SPACs acquire. As most of these charts illustrate, SPAC stocks tend to be losers for many passive investors—with notable exceptions, such as Virgin Galactic and DraftKings.

SPCE

60 55 50 45 40 35 30 25 20

Jul ′19

Sep ′19

Nov ′19

Jan ′20

Mar ′20

May ′20

Jul ′20

Sep ′20

Nov ′20

Jan ′21

DKNG

70 65 60 55 50 45 40 35 30 25 20

Jul ′19

Sep ′19

Nov ′19

Jan ′20

Mar ′20

May ′20

Jul ′20

Sep ′20

Nov ′20

Jan ′21

A company featured in the April issue, Virgin Galactic (SPCE), has been one of the most successful SPAC offerings.

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.

May 2021 | Luckbox

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Looking for a new way to speculate short-term? LEARN ABOUT THE SMALLS AT: TASTYWORKS.COM/TRADETHESMALLS tastyworks, Inc. is a member of NFA and an affiliate of Small Exchange, Inc. Futures trading is not suitable for all investors due to the inherent risks involved. Read all Futures Risk Disclosures on tastyworks.com/disclosures. © 2020 Small Exchange, Inc.

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FUTURES

A SAV V Y F U T U R ES T RADER’S TAK E O N T HE M AR K ETS

Make up for Missed Opportunities By Pete Mulmat

elieve it or not, the market for U.S. dollars bears some similarity to GameStop (GME) stock. How? Both rallied from historical lows to start 2021, fell back to those lows in February and woke up again in March. So where does that leave them? In an awkward position that has often brought traders consternation: a potential buy that’s simultaneously showing signs of life and presenting less value. But don’t look back in anger over missed opportunities to invest in the dollar or GameStop. Rarely do traders buy a stock or currency at the absolute lowest price. And opportunity could still be on the table if the market continues higher. So deciding whether or not to buy should come down to whether or not one still sees upside. Sometimes the most difficult part of trading the dollar is deciding which currency “pair” to pick. The Small Dollar Index (SFX) combines the euro, Chinese renminbi, Japanese yen, British pound, Canadian dollar, Australian dollar and Mexican peso. The index provides a simple way to participate in the foreign exchange market. What can help ease the frustration of missing the opportunity to buy low? Option premium. Calls against GameStop shares or puts in the U.S. dollar’s competitors against SFX contracts can get that long position’s breakeven closer to those lows a trader may have missed. With SFX options coming and other dollar products lacking, traders can go to other currencies to partially hedge. There’s no point in fretting about missed opportunities, especially if there’s still potential for growth.

Dollars versus GameStop Despite wildly differing charts over the long haul, the U.S. dollar and GameStop have followed similar patterns in recent months.The chart depicts the dollar in black. Source: dxFeed Index Services (indexit.dxfeed.com)

Thinking big on small trades Hedge ratios can add a theta component to small-dollar trades Long SFX Future + Short May Options /6E

/6J

Short 1 1.18 Put

Short 1

0.0091 Put

Short 1

1.13 Put

Long 1

0.00905 Put

Long 1

1.36 Put

1.175 Put

/6B

Pete Mulmat, chief futures strategist at tastytrade, serves as host for a number of daily futures segments on the tastytrade network under the main flagship programming slot called Splash Into Futures. @traderpetem

May 2021 | Luckbox

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4/9/21 12:25 PM

THE LAST PICTURE Retirement Ink Comes

PHOTOGRPAH: REUTERS/ALEXEI KOLCHIN

Pensioner Vladimir Sedakov, pictured here at his home in Yekaterinburg, Russia, says he’s determined to cover his entire body in tatoos. In the meantime, he’s maintaining an admirably active lifestyle. The 74-year-old paints, wears costumes and tends to his pet goat. In Russia, males are eligible for retirement payouts of 15,744 rubles ($205.98) per month at age 60 1/2—women at age 55.

Luckbox | May 2021

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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 ’S PRE-PROHIBITION GOLDEN ERA. F E W COMBINES A HIGH RYE CONTENT & PEPPERY YE A ST TO MAKE A UNIQUELY SPIC Y BOURBON.

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May 2021

Articles inside

MEET ILYA SPIVAK

The King of SPACs

SPACs Have Their Moment

The Serendipity Mindset