Hi guys,submitted by getmrmarket to Forex [link] [comments]
I have been using reddit for years in my personal life (not trading!) and wanted to give something back in an area where i am an expert.
I worked at an investment bank for seven years and joined them as a graduate FX trader so have lots of professional experience, by which i mean I was trained and paid by a big institution to trade on their behalf. This is very different to being a full-time home trader, although that is not to discredit those guys, who can accumulate a good amount of experience/wisdom through self learning.
When I get time I'm going to write a mid-length posts on each topic for you guys along the lines of how i was trained. I guess there would be 15-20 topics in total so about 50-60 posts. Feel free to comment or ask questions.
The first topic is Risk Management and we'll cover it in three parts
Why it mattersThe first rule of making money through trading is to ensure you do not lose money. Look at any serious hedge fund’s website and they’ll talk about their first priority being “preservation of investor capital.”
You have to keep it before you grow it.
Strangely, if you look at retail trading websites, for every one article on risk management there are probably fifty on trade selection. This is completely the wrong way around.
The great news is that this stuff is pretty simple and process-driven. Anyone can learn and follow best practices.
Seriously, avoiding mistakes is one of the most important things: there's not some holy grail system for finding winning trades, rather a routine and fairly boring set of processes that ensure that you are profitable, despite having plenty of losing trades alongside the winners.
Capital and position sizingThe first thing you have to know is how much capital you are working with. Let’s say you have $100,000 deposited. This is your maximum trading capital. Your trading capital is not the leveraged amount. It is the amount of money you have deposited and can withdraw or lose.
Position sizing is what ensures that a losing streak does not take you out of the market.
A rule of thumb is that one should risk no more than 2% of one’s account balance on an individual trade and no more than 8% of one’s account balance on a specific theme. We’ll look at why that’s a rule of thumb later. For now let’s just accept those numbers and look at examples.
So we have $100,000 in our account. And we wish to buy EURUSD. We should therefore not be risking more than 2% which $2,000.
We look at a technical chart and decide to leave a stop below the monthly low, which is 55 pips below market. We’ll come back to this in a bit. So what should our position size be?
We go to the calculator page, select Position Size and enter our details. There are many such calculators online - just google "Pip calculator".
So the appropriate size is a buy position of 363,636 EURUSD. If it reaches our stop level we know we’ll lose precisely $2,000 or 2% of our capital.
You should be using this calculator (or something similar) on every single trade so that you know your risk.
Now imagine that we have similar bets on EURJPY and EURGBP, which have also broken above moving averages. Clearly this EUR-momentum is a theme. If it works all three bets are likely to pay off. But if it goes wrong we are likely to lose on all three at once. We are going to look at this concept of correlation in more detail later.
The total amount of risk in our portfolio - if all of the trades on this EUR-momentum theme were to hit their stops - should not exceed $8,000 or 8% of total capital. This allows us to go big on themes we like without going bust when the theme does not work.
As we’ll see later, many traders only win on 40-60% of trades. So you have to accept losing trades will be common and ensure you size trades so they cannot ruin you.
Similarly, like poker players, we should risk more on trades we feel confident about and less on trades that seem less compelling. However, this should always be subject to overall position sizing constraints.
For example before you put on each trade you might rate the strength of your conviction in the trade and allocate a position size accordingly:
To keep yourself disciplined you should try to ensure that no more than one in twenty trades are graded exceptional and allocated 5% of account balance risk. It really should be a rare moment when all the stars align for you.
Notice that the nice thing about dealing in percentages is that it scales. Say you start out with $100,000 but end the year up 50% at $150,000. Now a 1% bet will risk $1,500 rather than $1,000. That makes sense as your capital has grown.
It is extremely common for retail accounts to blow-up by making only 4-5 losing trades because they are leveraged at 50:1 and have taken on far too large a position, relative to their account balance.
Consider that GBPUSD tends to move 1% each day. If you have an account balance of $10k then it would be crazy to take a position of $500k (50:1 leveraged). A 1% move on $500k is $5k.
Two perfectly regular down days in a row — or a single day’s move of 2% — and you will receive a margin call from the broker, have the account closed out, and have lost all your money.
Do not let this happen to you. Use position sizing discipline to protect yourself.
Kelly CriterionIf you’re wondering - why “about 2%” per trade? - that’s a fair question. Why not 0.5% or 10% or any other number?
The Kelly Criterion is a formula that was adapted for use in casinos. If you know the odds of winning and the expected pay-off, it tells you how much you should bet in each round.
This is harder than it sounds. Let’s say you could bet on a weighted coin flip, where it lands on heads 60% of the time and tails 40% of the time. The payout is $2 per $1 bet.
Well, absolutely you should bet. The odds are in your favour. But if you have, say, $100 it is less obvious how much you should bet to avoid ruin.
Say you bet $50, the odds that it could land on tails twice in a row are 16%. You could easily be out after the first two flips.
Equally, betting $1 is not going to maximise your advantage. The odds are 60/40 in your favour so only betting $1 is likely too conservative. The Kelly Criterion is a formula that produces the long-run optimal bet size, given the odds.
Applying the formula to forex trading looks like this:
Position size % = Winning trade % - ( (1- Winning trade %) / Risk-reward ratio
If you have recorded hundreds of trades in your journal - see next chapter - you can calculate what this outputs for you specifically.
If you don't have hundreds of trades then let’s assume some realistic defaults of Winning trade % being 30% and Risk-reward ratio being 3. The 3 implies your TP is 3x the distance of your stop from entry e.g. 300 pips take profit and 100 pips stop loss.
So that’s 0.3 - (1 - 0.3) / 3 = 6.6%.
Hold on a second. 6.6% of your account probably feels like a LOT to risk per trade.This is the main observation people have on Kelly: whilst it may optimise the long-run results it doesn’t take into account the pain of drawdowns. It is better thought of as the rational maximum limit. You needn’t go right up to the limit!
With a 30% winning trade ratio, the odds of you losing on four trades in a row is nearly one in four. That would result in a drawdown of nearly a quarter of your starting account balance. Could you really stomach that and put on the fifth trade, cool as ice? Most of us could not.
Accordingly people tend to reduce the bet size. For example, let’s say you know you would feel emotionally affected by losing 25% of your account.
Well, the simplest way is to divide the Kelly output by four. You have effectively hidden 75% of your account balance from Kelly and it is now optimised to avoid a total wipeout of just the 25% it can see.
This gives 6.6% / 4 = 1.65%. Of course different trading approaches and different risk appetites will provide different optimal bet sizes but as a rule of thumb something between 1-2% is appropriate for the style and risk appetite of most retail traders.
Incidentally be very wary of systems or traders who claim high winning trade % like 80%. Invariably these don’t pass a basic sense-check:
How to use stop losses sensiblyStop losses have a bad reputation amongst the retail community but are absolutely essential to risk management. No serious discretionary trader can operate without them.
A stop loss is a resting order, left with the broker, to automatically close your position if it reaches a certain price. For a recap on the various order types visit this chapter.
The valid concern with stop losses is that disreputable brokers look for a concentration of stops and then, when the market is close, whipsaw the price through the stop levels so that the clients ‘stop out’ and sell to the broker at a low rate before the market naturally comes back higher. This is referred to as ‘stop hunting’.
This would be extremely immoral behaviour and the way to guard against it is to use a highly reputable top-tier broker in a well regulated region such as the UK.
Why are stop losses so important? Well, there is no other way to manage risk with certainty.
You should always have a pre-determined stop loss before you put on a trade. Not having one is a recipe for disaster: you will find yourself emotionally attached to the trade as it goes against you and it will be extremely hard to cut the loss. This is a well known behavioural bias that we’ll explore in a later chapter.
Learning to take a loss and move on rationally is a key lesson for new traders.
A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not.
Bruce Kovner, founder of the hedge fund Caxton Associates
There is an old saying amongst bank traders which is “losers average losers”.
It is tempting, having bought EURUSD and seeing it go lower, to buy more. Your average price will improve if you keep buying as it goes lower. If it was cheap before it must be a bargain now, right? Wrong.
Where does that end? Always have a pre-determined cut-off point which limits your risk. A level where you know the reason for the trade was proved ‘wrong’ ... and stick to it strictly. If you trade using discretion, use stops.
Picking a clear levelWhere you leave your stop loss is key.
Typically traders will leave them at big technical levels such as recent highs or lows. For example if EURUSD is trading at 1.1250 and the recent month’s low is 1.1205 then leaving it just below at 1.1200 seems sensible.
If you were going long, just below the double bottom support zone seems like a sensible area to leave a stop
You want to give it a bit of breathing room as we know support zones often get challenged before the price rallies. This is because lots of traders identify the same zones. You won’t be the only one selling around 1.1200.
The “weak hands” who leave their sell stop order at exactly the level are likely to get taken out as the market tests the support. Those who leave it ten or fifteen pips below the level have more breathing room and will survive a quick test of the level before a resumed run-up.
Your timeframe and trading style clearly play a part. Here’s a candlestick chart (one candle is one day) for GBPUSD.
If you are putting on a trend-following trade you expect to hold for weeks then you need to have a stop loss that can withstand the daily noise. Look at the downtrend on the chart. There were plenty of days in which the price rallied 60 pips or more during the wider downtrend.
So having a really tight stop of, say, 25 pips that gets chopped up in noisy short-term moves is not going to work for this kind of trade. You need to use a wider stop and take a smaller position size, determined by the stop level.
There are several tools you can use to help you estimate what is a safe distance and we’ll look at those in the next section.
There are of course exceptions. For example, if you are doing range-break style trading you might have a really tight stop, set just below the previous range high.
Clearly then where you set stops will depend on your trading style as well as your holding horizons and the volatility of each instrument.
Here are some guidelines that can help:
For example if you stop understanding why a product is going up or down and your fundamental thesis has been confirmed wrong, get out. For example, if you are long because you think the central bank is turning hawkish and AUDUSD is going to play catch up with rates … then you hear dovish noises from the central bank and the bond yields retrace lower and back in line with the currency - close your AUDUSD position. You already know your thesis was wrong. No need to give away more money to the market.
Coming up in part IIEDIT: part II here
Letting stops breathe
When to change a stop
Entering and exiting winning positions
Coming up in part IIISqueezes and other risks
Crap trades, timeouts and monthly limits
Disclaimer:This content is not investment advice and you should not place any reliance on it. The views expressed are the author's own and should not be attributed to any other person, including their employer.
Would you like to entertain yourself with a story about one of the greatest schemes in the history and, maybe, learn a few plays? This story is about three brave autistic brothers, who almost cornered the entire commodity and how one (not so brave, but shrewd) bank did it without anyone noticing. As in any good fable – there’s a moral and a strategy that you could draw from it.submitted by negovany to wallstreetbets [link] [comments]
The year is 1971. Nixon temporarily abolishes gold standard. And every temporary government program is never reversed, as you know. Trading price of gold went sky high: from 270s to 800s in two years or so. Enter Hunt brothers, sons of H. L. Hunt, oil tycoon, one of, if not the, richest man in the world at that time. Hunt family was, what one might describe as, right-wing libertarian and anti-globalist. They believed that Keynesian economics and the US shift to the left in the 60s will lead to the debasement of the US dollar and monetary collapse. Thus, return to the gold or silver standard was the way, as they thought. Allegedly, Hunts also had a feud with Rothschild family and other financial speculators, and were resentful towards the US government for doing nothing to protect their oil assets in Libya, confiscated by Gaddafi. So they started their move against America, alpha-silver bug style.
In 1973 Hunts began buying all the silver they could. And, instead of just speculating futures contracts, they actually took delivery. Initial price was $1.5/oz. Silver was shipped to Switzerland in secretive and costly operations and stored in vaults (brothers feared confiscations – remember, private citizens were still prohibited from owning gold in the US).
The following events are quite vivid and include the efforts to create a cartel similar to OPEC, talks with Iran and Saudi monarchs, pump and dump publicity and large scale purchases of miners. But we will spare the details, except one: Hunts even tried to corner the soy market at the same time. Reminds you how WSB slv gang quickly switched to corn gang. But the soy scheme didn't fly and they focused on silver only. Their efforts pumped the price to almost $50/oz by early 1980. At some point Hunts controlled around 230 million oz of silver and the majority of what was traded.
Hunt brothers laughing at your pump&dump effort
Of course, when you are such a smart ass, you become a target. Chicago exchange officials became very concerned citizens by 1979. They started issuing numerous regulations limiting the amount of market share one can accumulate in one hands. As all American concerned citizens, they had financial incentive to do so: Hunts managed to prove that Chicago exchange board members had short positions against silver. Finally, CFTC (Commodity Futures Trading Commission) issued a ruling that basically forced Hunts to liquidate part of their portfolio by February 1980. This sent silver prices down dramatically and brothers started to get margin calls which they could not cover. And so their story ended with bankruptcies and heavy fines for the family. Shortly after, Reagan and Volcker raised interest rates and silver price never recovered to $50/oz ever since.
We skip to the year 2008. Global financial crisis is in full swing. Bear Stearns is royally fucked, as due to all bears. Before the music was over, they mastered paper speculation of futures contracts like no one else. Bear Stearns accumulated world biggest naked short position on silver. What could go wrong? Stonks go up, silver goes down. Until it reversed and silver skyrocketed from $11 to $21. This became one of the margin calls to screw Bear Stearns. JP Morgan is asked by the FED and co. to buy out BS and to save the entire market. Since BS's shorts are now deeply down - JPM gets the whole bank with pennies on a dollar.
But the problem is that JPM themselves have massive naked short position on silver. Combined with BS it will exceed anything permitted by the CFTC. Since Obama administration was in a rush, they push CFTC to grant JPM basically a carte blanche to accumulate any position over the limit for a period of time. Period of time comes due and turns out that JPM not only didn’t trim the shorts significantly – they even bought more shorts at some point. Even with all the fines, it went very much their way, because in 2009 silver dropped. So they pocketed hundreds of millions of dollars.
But come 2011 and silver spiked again, dramatically. JPM, now bleeding cash on shorts, could close short positions, like any of us would do, right? Nope, fuckyall says JPM and starts hedging short futures positions with… physical silver. 'But wouldn’t that be even more control over the commodity?' - you might ask. See, nothing in the rules of CFTC says you can’t do that, because to help cronies speculate with paper futures contracts, made of thin air, CFTC basically started treating physical silver and futures as two different instruments (it’s, actually, even more complicated than that: google difference between physical, eligible, registered and so on).
In the next 9 years JPM becomes the world biggest holder of both short contracts and physical silver. The later they 'loaned' to SLV trust, of which they are custodian. This way upkeep of physical silver, which otherwise would be a liability for hedging, becomes an asset, because we, retards, who own SLV pay the maintenance. People are often confused here, because SLV is issued by Black Rock, not JPM. Well, there is a difference between being an operator of a financial instrument and being a custodian providing backing. Now, to confuse you even more – JPM is one of the major holders of Black Rock itself with 1.6% or sth like that.
By estimates of Theodore Butler, JPM acquired 900 million oz of physical silver since 2011. That’s 4 times more than what Hunts owned. Just shows you, that banks can get a pass with something that even the richest individuals can not. And you have to give it to JPM - their play was very clever. Instead of risking it all on a margin call, they make money on every turn.
As of 2020, JPM still holds both shitton of physical silver and short COMEX contracts. You can call this the most epic straddle of all time. With such mass they can swing prices in any directions and profit from this on any given day. Latest example you’ve seen on the August 11th.
Why am I bothering your poor gambling soul with this wall of text, you might ask? Market makers manipulate the market as they please, what’s new about that? Well, here we come to the conclusions and a strategy. How can a small retard replicate what the big boys are doing?
a) Only long expiration dates and calls; no weekly expiration, not even monthly. Ideally – at least half year options;
b) Go long on certain silver stocks. Maybe I’ll do a write up on good silver stocks to buy;
c) Sell covered calls on long positions;
d) Buy 1-3 month puts on your long positions as a hedge;
Now, day trade with those positions: on red days sell your puts and buy back covered calls. On green days – reload puts and sell calls. Repeat until lambo.
P. S.: I gathered these facts from the open sources, since these events were of interest to me. Some facts are intentionally oversimplified, google for more details, there are good reads. And feel free to correct me if you know contradictory facts.
P. P. S.: JPM, plz don’t whack me.
Here’s what I want Steam to be: a place where I can easily and conveniently find games I wish to buy, buy them, and access them. I do not believe Valve and I’s outlook on this aligns.The last paragraph hits right on the nose the issue I've had with Steam for literally years. Back around 2008 when I first started buying games there, it was a pretty tightly curated market space with clearly delineated categories of games. A racing game was always just in the "Racing" category. Action games were under "Action" and simulations were under, you guessed it, "Simulation".
Valve seem to have some small interest in Steam performing these functions, but a much greater excitement for layering endless experimental systems on top of each other. The act of buying and playing games must itself be gamified from every possible angle.
Over the years, it’s introduced trading cards, badges, and a marketplace for in-game items. It’s given us countless different kinds of fake money, earned by spending real money, usually to be spent on stickers, emotes, profile backgrounds, and other gew-gaws I couldn’t even be confident in the function of.
...And as these experiments rumble on and mutate into ever less necessary forms, Valve neglects the core experience. The store is less usable now than it’s ever been, utterly clogged with nonsense and shovelware with incredibly poor moderation. Efforts to tailor the experience algorithmically have created more problems than they’ve solved, making it increasingly difficult to get to the page you actually want, rather than the one Steam thinks you’d like.
submitted by lurkingsince2006 to wallstreetbets [link] [comments]
tl;dr - Earnings is gonna be lit!PRPL earnings is tomorrow, 8/13, after hours. Any other date is wrong. Robinhood is wrong (why are you using Robinhood still!?!).
I'm going to take you through my earnings projections and reasoning as well the things to look for in the earnings release and the call that could make this moon even further.
I'm calling $244M Net Revenue with $39.75M in Net Income, which would be $0.75 Diluted EPS. I'll walk you through how I got here
Total Net RevenueI make the assumption that Purple is still selling every mattress it can make (since that is what they said for April and May) and that this continued into June because the website was still delayed 7-14 days across all mattresses at the end of June.
May Revenue and April DTC: The numbers in purple were provided by Purple here and here.
April Wholesale: My estimate of $2.7M for Wholesale sales in April comes from this statement from the Q1 earnings release: " While wholesale sales were down 42.7% in April year-over-year, weekly wholesale orders have started to increase on a sequential basis. " I divided Q2 2019's wholesale sales evenly between months and then went down 42.7%.
June DTC: This is my estimate based upon the fact that another Mattress Max machine went online June 1, thus increasing capacity, and the low end model was discontinued (raising revenue per unit).
June Wholesale: Joe Megibow stated at Commerce Next on 7/30 that wholesale had returned to almost flat growth. I'm going to assume he meant for the quarter, so I plugged the number here to finish out the quarter at $39.0M, just under $39.3M from a year ago.
Revenue Expectations from Analysts (via Yahoo)
My estimate of $244M comes in way over the high, let alone the consensus. PRPL has effectively already disclosed ~$145M for April/May, so these expectations are way off. I'm more right than they are.
Gross MarginsI used my estimates for Q3/Q4 2019 to guide margins in April/May as there were some one time events that occurred in Q1 depressing margins. June has higher margin because of the shift away from the low end model (which is priced substantially lower than the high end model). Higher priced models were given manufacturing priority.
Operating ExpensesMarketing and Sales
Joe mentioned in the Commerce Next video that they were able to scale sales at a constant CAC (Customer Acquisition Cost). There's three ways of interpreting this:
General and Administrative
A Purple HR rep posted on LinkedIn about hiring 330 people in the quarter. I'm going to assume that was relative to the pre-COVID furloughs, so I had June at that proportional amount to previous employees and adjusted April and May for furloughs and returns from furlough.
Research and Development
I added just a little here and straight lined it.
Other ExpensesInterest Expense
Straightlined from previous quarters, although they may have tapped ABL lines and so forth, so this could be under.
One Time and Other
Unpredictable by nature.
Warrant Liability Accrual
I'm making some assumptions here.
Earnings (EPS)I project $39.75M or $0.75 Diluted EPS (53M shares). How does this hold up to the analysts?
EPS Expectations from Analysts (via Yahoo)
EPS Expectations from Analysts (via MarketBeat)
These losers are way under. Now you know why I am so optimistic about earnings.
Keep in mind, these analysts are still giving $28-$30 price targets.
What to Watch For During Earnings (aka Reasons Why This Moons More)Analysts, Institutionals, and everyone else who uses math for investing is going to be listening for the following:
This factor is HUGE. If PRPL guides to higher margins due to better sales mix and continued DTC shift, then every analyst and investor is going to tweak their models up in a big way. Thus far, management has been relatively cautious about this fortuitous shift to DTC continuing. If web traffic is any indicator, it will, but we need management to tell us that.
Warrant Liability Accrual
I could be dead wrong on my assumptions above on this one. If it stays, there will be questions about it due to the drop in exercise price. It does impact GAAP earnings (although it shouldn't--stupid accountants).
Capacity Expansion Rate
This is a BIG one as well. As PRPL has been famously capacity constrained: their rate of manufacturing capacity expansion is their growth rate over the next year. PRPL discontinued expansion at the beginning of COVID and then re-accelerated it to a faster pace than pre-COVID by hurrying the machines in-process out to the floor. They also signed their manufacturing space deal which has nearly doubled manufacturing space a quarter early. The REAL question is when the machines will start rolling out. Previous guidance was end of the year at best. If we get anything sooner than that, we are going to ratchet up.
CACs (Customer Acquisition Costs)
Since DTC is the new game in town, we are all going to want to understand exactly where marketing expenses were this quarter and, more importantly, where management thinks they are going. The magic words to listen for are "marketing efficiencies". Those words means the stock goes up. This is the next biggest line item on the P&L besides revenue and cost of goods sold.
New Product Categories
We heard the VP of Brand from Purple give us some touchy-feely vision of where the company is headed and that mattresses was just the revenue generating base to empower this. I'm hoping we hear more about this. This is what differentiated Amazon from Barnes and Noble: Amazon's vision was more than just books. Purple sees itself as more than just mattresses. Hopefully we get some announced action behind that vision. This multiplies the stock.
Cashless Exercise of PRPLW Warrants
I doubt this will be answered, even if the question is asked. I bet they wait until the 20 out of 30 days is up and they deliver notice. We could be pleasantly surprised. If management informs us that they will opt for cashless exercise of the warrants, this is anti-dilutive to EPS. It will reduce the number of outstanding shares and automatically cause an adjustment up in the stock price (remember kids, some people use math when investing). I'm hopeful, but not expecting it. The amount of the adjustment depends on the current price of the stock. Also, I fully expect PRPL management to use their cashless exercise option at the end of the 20 out of 30 days as they are already spitting cash.
I'm not just holding, I added.
PRPLW Warrants: 391,280
PRPL Call Debit Spreads: 17.5c/25c 8/21 x90, 20c/25c 8/21 x247
Also, I bought some CSPR 7.5p 8/21 x200 for fun because I think that sucker is going to get shamed back down to $6 after a real mattress company shows what it can do.
UPDATESI've made some updates to the model, and produced two different models:
From the recent S-3 filing for the May secondary, I pulled the following:
I diluted earnings by the above share count.
Model With Warrant Liability Going to Zero
Model With Warrant Liability Going to $47M
A few people called me out on my assumption, that I also said could be wrong. My favorite callout came from u/lawschoolbluesny who started all smug and condescending, and proceeded to tell me about June 31st, from which I couldn't stop laughing. Stay in law school bud a bit longer...
One other comment he made needs an answer because WHY we are accruing MATTERS a lot!
Now that we have established that coliseum still has not exercised the options as of july 7, and that purple needs to record as a liability the fair value of the options as of june 31, we now need to determine what that fair value is. You state that since you believe that there is no logical reason that coliseum won't redeem their warrants "there is no longer a warrant liability where the company may need to repurchase warrants back." While I'm not 100% certain your logic here, I can say for certain that whether or not a person will redeem their warrants does not dictate how prpl accounts for them.
The warrant liability accrual DOES NOT exist because the warrants simply exist. The accrual exists because the warrants give the warrant holder the right to force the company to buy back the warrants for cash in the event of a fundamental transaction for Black Scholes value ($18 at the end of June--June 31st that is...). And accruals are adjusted for the probability of a particular event happening, which I STILL argue is close to zero.
A fundamental transaction did occur. The Pearce brothers sold more than 10M shares of stock which is why the exercise price dropped to zero. (Note for DS_CPA1 on Stocktwits: there is some conflicting filings as to what the exercise price can drop to. The originally filed warrant draft says that the warrant exercise price cannot drop to zero, but asubsequently filed S-3, the exercise price is noted as being able to go to zero. I'm going with the S-3.)
Now, here is where it gets fun. We know from from the Schedule 13D filed with a July 1, 2020 event date from Coliseum that Coliseum DID NOT force the company to buy back the warrants in the fundamental transaction triggered by the Pearce Brothers (although they undoubtably accepted the $0 exercise price). THIS fundamental transaction was KNOWN to PRPL at the end Q4 and Q1 as secondary filings were made the day after earnings both times. This drastically increased the probability of an event happening.
Where is the next fundamental transaction that could cause the redemption for cash? It isn't there. What does exist is a callback option if the stock trades above $24 for 20 out of 30 days, which we are already 8 out of 10 days into.
Based upon the low probability of a fundamental transaction triggering a redemption, the accrual will stay very low. Even the CFO disagrees with me and we get a full-blown accrual, I expect a full reversal of the accrual next quarter if the 20 out of 30 day call back is exercised by the company.
I still don't understand why Coliseum would not have exercised these.
Regardless, the Warrant Liability Accrual is very fake and will go away eventually.
ONE MORE THING...Seriously, stop PMing me with stupid, simple questions like "What are your thoughts on earnings?", "What are your thoughts on holding through earnings?", and "What are your thoughts on PRPL?".
It's here. Above. Read it. I'm not typing it again in PM. I've gotten no less than 30 of these. If you're too lazy to read, I'm too lazy to respond to you individually.
submitted by CJT2013 to Daytrading [link] [comments]
Cash vs. Margin
TL;DR- Use Margin if you're trading securities and either above or below 25k. If you know how to size positions, it won't matter if you move $4,000 into a trade or $4,000,000. As long as you sized the position correctly. If you're limited to 3 trades, then take 3 PERFECT trades: https://imgur.com/a/SpPOERQ
I see lots of people discussing contrasting ideas although they attempt to justify using both. Here are some things I see said and written frequently from people that doesn't add up for me:
The Predictive Model I built lays out all valid trades within the report range as well as \"Perfect Trades\" that I consider \"Textbook\". The report range is between a 30 day range. Between 4-17-20 to 5-17-20. Total \"Perfect Trade\" count is 9 trades. Even if I were limited to 3 trades per week. I'd be able to trade them with less than 25k on margin. The stats reflect $100 risk I've set on a different tab. (The \"W\" is just a graphic I made for \"Winning\")
It doesn’t matter if you move $4,000, $40,000, or $4,000,000 into a position. As long as you’re risking the same. Your Trading Account's performance is based off of risk. Such as:
•Number of R’s in 1 week/month/quarter. (Example: I made 7R this week. If my R is $100. I made $700)
If I were to go back to when I was below $25,000 some years ago. I'd still use a margin account while being limited to 3 trades per week. Here's why:Formulas you have to know:
Position size formula = Risk ÷ Stop Size
Stop Size Formula = Entry - StopLoss
Example 1a:Stock ABC,
Entry = $10.00
StopLoss = $9.90
StopSize = 10¢
Risk = $100
In Live Trading: $100 ÷ $0.10 = 1000 Shares
1,000 shares at $10.00 = $10,000 position
Example 1b:Stock XYZ,
Entry = $385
StopLoss = $383.00
StopSize = $2.00
Risk = $100
In Live Trading: $100 ÷ $2.00 = 50 Shares
50 shares at $385 = $19,250 position.
*$10,000 CASH account: CANNOT trade Stock XYZ and must wait 3 days for his entire account to settle after trading Stock ABC. If it was a margin account, they'd still be able to take 2 more trades this week.
*$10,000 MARGIN account: CAN trade Stock XYZ and can trade both scenarios while still able to trade 1 more time in a 5 day rolling period.
Then the next point made is, "Just won't trade anything above $20".
Ok. great rebuttal, but why?
Let's remember this: StopSizes aren't always directly correlated to the price of a stock. YES you're more likely to have a wider StopSize on a higher priced stock and a tighter StopSize on a lower priced stock. But remember this: 1¢ of slippage on 1,000 shares is 10% of his risk ($10)... It will be even more slippage if his stop loss market order is hit. Even a Sell-StopLimit order will have slippage within the amount you allow for when you enter a position.
Stock XYZ would have to be slipped 20¢ just to equate the amount of slippage on Stock ABC.Highly liquid and available stocks such as AAPL, AMD, NVDA etc don't have 20¢ spreads. Not even 10¢. Rarely 5¢. Most of the time. Just a couple cents. Of course there could be more right out of the open but the spread in my years of experience is tightened within 2 minutes of the open.
Yes, these small amounts in pennies do hold lots of merit if you're looking at having any longevity in this business, it WILL add up over the years.
Both trades have the same risk [in perfect world theory].If both stop market orders were hit (StopLoss). Both traders would exit with a $100 loss on each. Although 1 trade required $10,000 in capital and the other trade required $19,250 in capital.
Use margin. If I had to go back to when I had less than $25,000 in my account, I'd still do it the same way I did it with margin. I highly suggest using margin even if you’re limited to 3 trades per week. I get asked all the time when I began trading. If you watched my last video, I showed my first ever deposit with Scottrade (Old brokerage that was bought out by TDA a few years ago) in 2015 although I don't consider that's when I started trading because I didn't treat it the way I do today.
I really consider myself starting as a trader in 2017 when I:
•Wrote a business plan
•How to research.
All this being said, slowly over time I noticed that I am taking less and less trades and increasing my risk size. Why?
EV: Expected Value.
- Margin has zero negative effect if you're sizing your positions the same every time. Margin allows you to take on more expensive positions that are showing your edge.
Bonus: Being limited to 3 trades a week isn't fun, I remember that feeling from years ago. Just remember to take 3 perfect trades a week. Sometimes "Perfect Trades" don't work out in your favor while some subpar situations hit target. Some weeks you might take your 3 "Perfect Trades" by Tuesday. Some weeks you might take only 1 "perfect trade". If you follow my watchlists on Twitter (Same handle as my Reddit), I keep my Day Trading Buying Power transparent. Not always is it growing perfectly linear. And not always am I posting every single day because sometimes, my edge isn't there. Just because the market is open doesn't mean you HAVE to trade.
My watchlists aren't littered with 15+ tickers. Rarely do they have more than 7. That may work for other traders, but for me, I demand quality. It's either there or it isn't. No reason to force a trade. I'd rather focus heavily on a few tickers rather than spread myself thin across multiple.
Trading isn't supposed to be exhilarating or an adrenaline rush. It can be boring. I said that in the post I wrote back in April.
Also if you make money, even if its just $20 in a month. Take that money out and buy something. Shrine it. Cherish it. You ripped that money out of WallStreet. Be proud of it. It takes a lot of courage to do this business. Realize that the P/L is real money. Sometimes even just buying a tank of gas or a book will help you realize that. Spend it from time to time. Get something out of your trading account. You may or not be trading for long, get something that is tangible to always remember the experience in case you don't last. Make it your trophy.
That's all I've got for right now. Maybe I'll make another post or 2 before the year ends. I hit my 1 year full-time mark in September.
Richard Dobatse, a Navy medic in San Diego, dabbled infrequently in stock trading. But his behavior changed in 2017 when he signed up for Robinhood, a trading app that made buying and selling stocks simple and seemingly free.
Mr. Dobatse, now 32, said he had been charmed by Robinhood’s one-click trading, easy access to complex investment products, and features like falling confetti and emoji-filled phone notifications that made it feel like a game. After funding his account with $15,000 in credit card advances, he began spending more time on the app.
As he repeatedly lost money, Mr. Dobatse took out two $30,000 home equity loans so he could buy and sell more speculative stocks and options, hoping to pay off his debts. His account value shot above $1 million this year — but almost all of that recently disappeared. This week, his balance was $6,956.
“When he is doing his trading, he won’t want to eat,” said his wife, Tashika Dobatse, with whom he has three children. “He would have nightmares.”
Millions of young Americans have begun investing in recent years through Robinhood, which was founded in 2013 with a sales pitch of no trading fees or account minimums. The ease of trading has turned it into a cultural phenomenon and a Silicon Valley darling, with the start-up climbing to an $8.3 billion valuation. It has been one of the tech industry’s biggest growth stories in the recent market turmoil.
But at least part of Robinhood’s success appears to have been built on a Silicon Valley playbook of behavioral nudges and push notifications, which has drawn inexperienced investors into the riskiest trading, according to an analysis of industry data and legal filings, as well as interviews with nine current and former Robinhood employees and more than a dozen customers. And the more that customers engaged in such behavior, the better it was for the company, the data shows.
Thanks for reading The Times. Subscribe to The Times More than at any other retail brokerage firm, Robinhood’s users trade the riskiest products and at the fastest pace, according to an analysis of new filings from nine brokerage firms by the research firm Alphacution for The New York Times.
In the first three months of 2020, Robinhood users traded nine times as many shares as E-Trade customers, and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account in the most recent quarter. They also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size, according to the analysis.
The more often small investors trade stocks, the worse their returns are likely to be, studies have shown. The returns are even worse when they get involved with options, research has found.
This kind of trading, where a few minutes can mean the difference between winning and losing, was particularly hazardous on Robinhood because the firm has experienced an unusual number of technology issues, public records show. Some Robinhood employees, who declined to be identified for fear of retaliation, said the company failed to provide adequate guardrails and technology to support its customers.
Those dangers came into focus last month when Alex Kearns, 20, a college student in Nebraska, killed himself after he logged into the app and saw that his balance had dropped to negative $730,000. The figure was high partly because of some incomplete trades.
“There was no intention to be assigned this much and take this much risk,” Mr. Kearns wrote in his suicide note, which a family member posted on Twitter.
Like Mr. Kearns, Robinhood’s average customer is young and lacks investing know-how. The average age is 31, the company said, and half of its customers had never invested before.
Some have visited Robinhood’s headquarters in Menlo Park, Calif., in recent years to confront the staff about their losses, said four employees who witnessed the incidents. This year, they said, the start-up installed bulletproof glass at the front entrance.
“They encourage people to go from training wheels to driving motorcycles,” Scott Smith, who tracks brokerage firms at the financial consulting firm Cerulli, said of Robinhood. “Over the long term, it’s like trying to beat the casino.”
At the core of Robinhood’s business is an incentive to encourage more trading. It does not charge fees for trading, but it is still paid more if its customers trade more.
That’s because it makes money through a complex practice known as “payment for order flow.” Each time a Robinhood customer trades, Wall Street firms actually buy or sell the shares and determine what price the customer gets. These firms pay Robinhood for the right to do this, because they then engage in a form of arbitrage by trying to buy or sell the stock for a profit over what they give the Robinhood customer.
This practice is not new, and retail brokers such as E-Trade and Schwab also do it. But Robinhood makes significantly more than they do for each stock share and options contract sent to the professional trading firms, the filings show.
For each share of stock traded, Robinhood made four to 15 times more than Schwab in the most recent quarter, according to the filings. In total, Robinhood got $18,955 from the trading firms for every dollar in the average customer account, while Schwab made $195, the Alphacution analysis shows. Industry experts said this was most likely because the trading firms believed they could score the easiest profits from Robinhood customers.
Vlad Tenev, a founder and co-chief executive of Robinhood, said in an interview that even with some of its customers losing money, young Americans risked greater losses by not investing in stocks at all. Not participating in the markets “ultimately contributed to the sort of the massive inequalities that we’re seeing in society,” he said.
Mr. Tenev said only 12 percent of the traders active on Robinhood each month used options, which allow people to bet on where the price of a specific stock will be on a specific day and multiply that by 100. He said the company had added educational content on how to invest safely.
He declined to comment on why Robinhood makes more than its competitors from the Wall Street firms. The company also declined to comment on Mr. Dobatse or provide data on its customers’ performance.
Robinhood does not force people to trade, of course. But its success at getting them do so has been highlighted internally. In June, the actor Ashton Kutcher, who has invested in Robinhood, attended one of the company’s weekly staff meetings on Zoom and celebrated its success by comparing it to gambling websites, said three people who were on the call.
Mr. Kutcher said in a statement that his comment “was not intended to be a comparison of business models nor the experience Robinhood provides its customers” and that it referred “to the current growth metrics.” He added that he was “absolutely not insinuating that Robinhood was a gambling platform.”
ImageRobinhood’s co-founders and co-chief executives, Baiju Bhatt, left, and Vlad Tenev, created the company to make investing accessible to everyone. Robinhood’s co-founders and co-chief executives, Baiju Bhatt, left, and Vlad Tenev, created the company to make investing accessible to everyone.Credit...via Reuters Robinhood was founded by Mr. Tenev and Baiju Bhatt, two children of immigrants who met at Stanford University in 2005. After teaming up on several ventures, including a high-speed trading firm, they were inspired by the Occupy Wall Street movement to create a company that would make finance more accessible, they said. They named the start-up Robinhood after the English outlaw who stole from the rich and gave to the poor.
Robinhood eliminated trading fees while most brokerage firms charged $10 or more for a trade. It also added features to make investing more like a game. New members were given a free share of stock, but only after they scratched off images that looked like a lottery ticket.
The app is simple to use. The home screen has a list of trendy stocks. If a customer touches one of them, a green button pops up with the word “trade,” skipping many of the steps that other firms require.
Robinhood initially offered only stock trading. Over time, it added options trading and margin loans, which make it possible to turbocharge investment gains — and to supersize losses.
The app advertises options with the tagline “quick, straightforward & free.” Customers who want to trade options answer just a few multiple-choice questions. Beginners are legally barred from trading options, but those who click that they have no investing experience are coached by the app on how to change the answer to “not much” experience. Then people can immediately begin trading.
Before Robinhood added options trading in 2017, Mr. Bhatt scoffed at the idea that the company was letting investors take uninformed risks.
“The best thing we can say to those people is ‘Just do it,’” he told Business Insider at the time.
In May, Robinhood said it had 13 million accounts, up from 10 million at the end of 2019. Schwab said it had 12.7 million brokerage accounts in its latest filings; E-Trade reported 5.5 million.
That growth has kept the money flowing in from venture capitalists. Sequoia Capital and New Enterprise Associates are among those that have poured $1.3 billion into Robinhood. In May, the company received a fresh $280 million.
“Robinhood has made the financial markets accessible to the masses and, in turn, revolutionized the decades-old brokerage industry,” Andrew Reed, a partner at Sequoia, said after last month’s fund-raising.
Image Robinhood shows users that its options trading is free of commissions. Robinhood shows users that its options trading is free of commissions. Mr. Tenev has said Robinhood has invested in the best technology in the industry. But the risks of trading through the app have been compounded by its tech glitches.
In 2018, Robinhood released software that accidentally reversed the direction of options trades, giving customers the opposite outcome from what they expected. Last year, it mistakenly allowed people to borrow infinite money to multiply their bets, leading to some enormous gains and losses.
Robinhood’s website has also gone down more often than those of its rivals — 47 times since March for Robinhood and 10 times for Schwab — according to a Times analysis of data from Downdetector.com, which tracks website reliability. In March, the site was down for almost two days, just as stock prices were gyrating because of the coronavirus pandemic. Robinhood’s customers were unable to make trades to blunt the damage to their accounts.
Four Robinhood employees, who declined to be identified, said the outage was rooted in issues with the company’s phone app and servers. They said the start-up had underinvested in technology and moved too quickly rather than carefully.
Mr. Tenev said he could not talk about the outage beyond a company blog post that said it was “not acceptable.” Robinhood had recently made new technology investments, he said.
Plaintiffs who have sued over the outage said Robinhood had done little to respond to their losses. Unlike other brokers, the company has no phone number for customers to call.
Mr. Dobatse suffered his biggest losses in the March outage — $860,000, his records show. Robinhood did not respond to his emails, he said, adding that he planned to take his case to financial regulators for arbitration.
“They make it so easy for people that don’t know anything about stocks,” he said. “Then you go there and you start to lose money.”
For this week's edition of DDDD (Data-Driven DD), we're going to look in-depth at some of the interesting things that have been doing on in the market over the past few weeks; I've had a lot more free time this week to write something new up, so you'll want to sit down and grab a cup of coffee for this because it will be a long one. We'll be looking into bankruptcies, how they work, and what some companies currently going through bankruptcies are doing. We'll also be looking at some data on retail and institutional investors, and take a closer look at how retail investors in particular are affecting the markets. Finally, we'll look at some data and magic markers to figure out what the market sentiment, the thing that's currently driving the market, looks like to help figure out if you should be buying calls or puts, as well as my personal strategy.submitted by ASoftEngStudent to wallstreetbets [link] [comments]
Disclaimer - This is not financial advice, and a lot of the content below is my personal opinion. In fact, the numbers, facts, or explanations presented below could be wrong and be made up. Don't buy random options because some person on the internet says so; look at what happened to all the SPY 220p 4/17 bag holders. Do your own research and come to your own conclusions on what you should do with your own money, and how levered you want to be based on your personal risk tolerance.
How Bankruptcies WorkFirst, what is a bankruptcy? In a broad sense, a bankruptcy is a legal process an individual or corporation (debtor) who owes money to some other entity (creditor) can use to seek relief from the debt owed to their creditors if they’re unable to pay back this debt. In the United States, they are defined by Title 11 of the United States Code, with 9 different Chapters that govern different processes of bankruptcies depending on the circumstances, and the entity declaring bankruptcy.
For most publicly traded companies, they have two options - Chapter 11 (Reorganization), and Chapter 7 (Liquidation). Let’s start with Chapter 11 since it’s the most common form of bankruptcy for them.
A Chapter 11 case begins with a petition to the local Bankruptcy court, usually voluntarily by the debtor, although sometimes it can also be initiated by the creditors involuntarily. Once the process has been initiated, the corporation may continue their regular operations, overseen by a trustee, but with certain restrictions on what can be done with their assets during the process without court approval. Once a company has declared bankruptcy, an automatic stay is invoked to all creditors to stop any attempts for them to collect on their debt.
The trustee would then appoint a Creditor’s Committee, consisting of the largest unsecured creditors to the company, which would represent the interests creditors in the bankruptcy case. The debtor will then have a 120 day exclusive right after the petition date to file a Plan of Reorganization, which details how the corporation’s assets will be reorganized after the bankruptcy which they think the creditors may agree to; this is usually some sort of restructuring of the capital structure such that the creditors will forgive the corporation’s debt in exchange for some or all of the re-organized entity’s equity, wiping out the existing stockholders. In general, there’s a capital structure pecking order on who gets first dibs on a company’s assets - secured creditors, unsecured senior bond holders, unsecured general bond holders, priority / preferred equity holders, and then finally common equity holders - these are the classes of claims on the company’s assets. After the exclusive period expires, the Creditor’s Committee or an individual creditor can themselves propose their own, possibly competing, Restructuring Plan, to the court.
A Restructuring Plan will also be accompanied by a Disclosure Statement, which will contain all the financial information about the bankrupt company’s state of affairs needed for creditors and equity holders to make an informed decision about how to proceed. The court will then hold a hearing to approve the Restructuring Plan and Disclosure Statement before the plan can be voted on by creditors and equity holders. In some cases, these are prepared and negotiated with creditors before bankruptcy is even declared to speed things up and have more favorable terms - a prepackaged bankruptcy.
Once the Restructuring Plan and Disclosure Statement receives court approval, the plan is voted on by the classes of impaired (i.e. debt will not be paid back) creditors to be confirmed. The legal requirement for a bankruptcy court to confirm a Restructuring Plan is to have at least one entire class of impaired creditors vote to accept the plan. A class of creditors is deemed to have accepted a Restructuring Plan when creditors that hold at least 2/3 of the dollar amount and at least half of the number of creditors vote to accept the plan. After another hearing, and listening to any potential objections to the proposed Restructuring Plan, such as other impaired classes that don't like the plan, the court may then confirm the plan, putting it to effect.
This is one potential ending to a Chapter 11 case. A case can also end with a conversion to a Chapter 7 (Liquidation) case, if one of the parties involved file a motion to do so for a cause that is deemed by the courts to be in the best interest of the creditors. In Chapter 7, the company ceases operating and a trustee is appointed to begin liquidating (i.e. selling) the company’s assets. The proceeds from the liquidation process are then paid out to creditors, with the most senior levels of the capital structure being paid out first, and the equity holders are usually left with nothing. Finally, a party can file a motion to dismiss the case for some cause deemed to be in the best interest of the creditors.
The Tale of Two Bankruptcies - WLL and HTZHertz (HTZ) has come into news recently, with the stock surging up to $6, or 1500% off its lows, for no apparent fundamental reason, despite the fact that they’re currently in bankruptcy and their stock is likely worthless. We’ll get around to what might have caused this later, for now, we’ll go over what’s going on with Hertz in its bankruptcy proceedings. To get a clearer picture, let’s start with a stock that I’ve been following since April - Whiting Petroleum (WLL).
WLL is a stock I’ve covered pretty extensively, especially with it’s complete price dislocation between the implied value of the restructured company by their old, currently trading, stock being over 10x the implied value of the bonds, which are entitled to 97% of the new equity. Usually, capital structure arbitrage, a strategy to profit off this spread by going long on bonds and shorting the equity, prevents this, but retail investors have started pumping the stock a few days after WLL’s bankruptcy to “buy the dip” and make a quick buck. Institutions, seeing this irrational behavior, are probably avoiding touching at risk of being blown out by some unpredictable and irrational retail investor pump for no apparent reason. We’re now seeing this exact thing play out a few months later, but at a much larger scale with Hertz.
So, how is WLL's bankruptcy process going? For anyone curious, you can follow the court case in Stretto. Luckily for Whiting, they’ve entered into a prepackaged bankruptcy process and filed their case with a Restructuring Plan already in mind to be able to have existing equity holders receive a mere 3% of new equity to be distributed among them, with creditors receiving 97% of new equity. For the past few months, they’ve quickly gone through all the hearings and motions and now have a hearing to receive approval of the Disclosure Statement scheduled for June 22nd. This hearing has been pushed back a few times, so this may not be the actual date. Another pretty significant document was just filed by the Committee of Creditors on Friday - an objection to the Disclosure Statement’s approval. Among other arguments about omissions and errors the creditor’s found in the Disclosure Statement, the most significant thing here is that Litigation and Rejection Damage claims holders were treated in the same class as a bond holders, and hence would be receiving part of their class’ share of the 97% of new equity. The creditors claim that this was misleading as the Restructuring Plan originally led them to believe that the 97% would be distributed exclusively to bond holders, and the claims for Litigation and Rejection Damage would be paid in full and hence be unimpaired. This objection argues that the debtors did this gerrymandering to prevent the Litigation and Rejection Damage claims be represented as their own class and able to reject the Restructuring Plan, requiring either payment in full of the claims or existing equity holders not receiving 3% of new equity, and be completely wiped out to respect the capital structure. I’d recommend people read this document if they have time because whoever wrote this sounds legitimately salty on behalf of the bond holders; here’s some interesting excerpts:
Moreover, despite the holders of Litigation and Rejection Damage Claims being impaired, existing equity holders will still receive 3% of the reorganized company’s new equity, without having to contribute any new value. The only way for the Debtors to achieve this remarkable outcome was to engage in blatant classification gerrymandering. If the Debtors had classified the Litigation and Rejection Damage Claims separately from the Noteholder claims and the go-forward Trade Claims – as they should have – then presumably that class would reject a plan that provides Litigation and Rejection Damage Claims with a pro rata share of minority equity.
The Debtors have placed the Rejection Damage and Litigation Claims in the same class as Noteholder Claims to achieve a particular result, namely the disenfranchisement of the Rejection Damage and Litigation Claimants who, if separately classified, may likely vote to reject the Plan. In that event, the Debtor would be required to comply with the cramdown requirements, including compliance with the absolute priority rule, which in turn would require payment of those claims in full, or else old equity would not be entitled to receive 3% of the new equity. Without their inclusion in a consenting impaired class, the Debtors cannot give 3% of the reorganized equity to existing equity holders without such holders having to contribute any new value or without paying the holders of Litigation and Rejection Damage Claims in full.
The Committee submits that the Plan was not proposed in good faith. As discussed herein, the Debtors have proposed an unconfirmable Plan – flawed in various important respects. Under the circumstances discussed above, in the Committee’s view, the Debtors will not be able to demonstrate that they acted with “honesty and good intentions” and that the Plan’s results will not be consistent with the Bankruptcy Code’s goal of ratable distribution to creditors.
They’re even trying to have the court stop the debtor from paying the lawyers who wrote the restructuring agreement.
However, as discussed herein, the value and benefit of the Consenting Creditors’ agreements with the Debtors –set forth in the RSA– to the Estates is illusory, and authorizing the payment of the Consenting Creditor Professionals would be tantamount to approving the RSA, something this Court has stated that it refuses to do.20 The RSA -- which has not been approved by the Court, and indeed no such approval has been sought -- is the predicate for a defective Plan that was not proposed in good faith, and that gives existing equity holders an equity stake in the reorganized enterprise even though Litigation and Rejection Damage Creditors will (presumably) not be made whole under the Plan and the existing interest holders will not be contributing requisite new value.
As a disclaimer, I have absolutely zero knowledge nor experience in law, let alone bankruptcy law. However, from reading this document, if what the objection indicates to be true, could mean that we end up having the court force the Restructuring agreement to completely wipe out the current equity holders. Even worse, entering a prepackaged bankruptcy in bad faith, which the objection argues, might be grounds to convert the bankruptcy to Chapter 7; again, I’m no lawyer so I’m not sure if this is true, but this is my best understanding from my research.
So what’s going on with Hertz? Most analysts expect that based on Hertz’s current balance sheet, existing equity holders will most likely be completely wiped out in the restructuring. You can keep track of Hertz’s bankruptcy process here, but it looks like this is going to take a few months, with the first meeting of creditors scheduled for July 1. An interesting 8-K got filed today for HTZ, and it looks like they’re trying to throw a hail Mary for their case by taking advantage of dumb retail investors pumping up their stock. They’ve just been approved by the bankruptcy court to issue and sell up to $1B (double their current market cap) of new shares in the stock market. If they somehow pull this off, they might have enough money raised to dismiss the bankruptcy case and remain in business, or at very least pay off their creditors even more at the expense of Robinhood users.
The Rise of Retail Investors - An UpdateA few weeks ago, I talked about data that suggested a sudden surge in retail investor money flooding the market, based on Google Trends and broker data. Although this wasn’t a big topic back when I wrote about it, it’s now one of the most popular topics in mainstream finance news, like CNBC, since it’s now the only rational explanation for the stock market to have pumped this far, and for bankrupt stocks like HTZ and WLL to have surges far above their pre-bankruptcy prices. Let’s look at some interesting Google Trends that I found that illustrates what retail investors are doing.
Google Trends - Margin Calls
Google Trends - Robinhood
Google Trends - What stock should I buy
Google Trends - How to day trade
Google Trends - Pattern Day Trader
Google Trends - Penny Stock
The conclusion that can be drawn from this data is that in the past two weeks, we are seeing a second wave of new retail investor interest, similar to the first influx we saw in March. In particular, these new retail investors seem to be particularly interested in day trading penny stocks, including bankrupt stocks. In fact, data from Citadel shows that penny stocks have surged on average 80% in the previous week.
Why Retail Investors Matter
A common question that’s usually brought up when retail investors are brought up is how much they really matter. The portfolio size of retail investors are extremely small compared to institutional investors. Anecdotally and historically, retail investors don’t move the market, outside of some select stocks like TSLA and cannabis stocks in the past few years. However when they do, shit gets crazy; the last time retail investors drove the stock market was in the dot com bubble. There’s a few papers that look into this with similar conclusions, I’ll go briefly into this one, which looks at almost 20 years of data to look for correlations between retail investor behavior and stock market movements. The conclusion was that behaviors of individual retail investors tend to be correlated and are not random and independent of each other. The aggregate effect of retail investors can then drive prices of equities far away from fundamentals (bubbles), which risk-averse smart money will then stay away from rather than try taking advantage of the mispricing (i.e. never short a bubble). The movement in the prices are typically short-term, and usually see some sort of reversal back to fundamentals in the long-term, for small (i.e. < $5000) trades. Apparently, the opposite is true for large trades; here’s an excerpt from the paper to explain.
Stocks recently sold by small traders perform poorly (−64 bps per month, t = −5.16), while stocks recently bought by small traders perform well (73 bps per month, t = 5.22). Note this return predictability represents a short-run continuation rather than reversal of returns; stocks with a high weekly proportion of buys perform well both in the week of strong buying and the subsequent week. This runs counter to the well-documented presence of short-term reversals in weekly returns.14,15 Portfolios based on the proportion of buys using large trades yield precisely the opposite result. Stocks bought by large traders perform poorly in the subsequent week (−36 bps per month, t = −3.96), while those sold perform well (42 bps per month, t = 3.57). We find a positive relationship between the weekly proportion of buyers initiated small trades in a stock and contemporaneous returns. Kaniel, Saar, and Titman (forthcoming) find retail investors to be contrarians over one-week horizons, tending to sell more than buy stocks with strong performance. Like us, they find that stocks bought by individual investors one week outperform the subsequent week. They suggest that individual investors profit in the short run by supplying liquidity to institutional investors whose aggressive trades drive prices away from fundamental value and benefiting when prices bounce back. Barber et al. (2005) document that individual investors can earn short term profits by supplying liquidity. This story is consistent with the one-week reversals we see in stocks bought and sold with large trades. Aggressive large purchases may drive prices temporarily too high while aggressive large sells drive them too low both leading to reversals the subsequent week.
Thus, using a one-week time horizon, following the trend can make you tendies for a few days, as long as you don’t play the game for too long, and end up being the bag holder when the music stops.
The Keynesian Beauty ContestThe economic basis for what’s going on in the stock market recently - retail investors driving up stocks, especially bankrupt stocks, past fundamental levels can be explained by the Keynesian Beauty Contest, a concept developed by Keynes himself to help rationalize price movements in the stock market, especially during the 1920s stock market bubble. A quote by him on the topic of this concept, that “the market can remain irrational longer than you can remain solvent”, is possibly the most famous finance quote of all time.
The idea is to imagine a fictional newspaper beauty contest that asks the reader to pick the six most attractive faces of 100 photos, and you win if you pick the most popular face. The naive strategy would be to pick the faces that you think are the most attractive. A smarter strategy is to figure out what the most common public perception of attractiveness would be, and to select based on that. Or better yet, figure out what most people believe is the most common public perception of what’s attractive. You end up having the winners not actually be the faces people think are the prettiest, but the average opinion of what people think the average opinion would be on the prettiest faces. Now, replace pretty faces with fundamental values, and you have the stock market.
What we have today is the extreme of this. We’re seeing a sudden influx of dumb retail money into the market, who don’t know or care about fundamentals, like trading penny stocks, and are buying beaten down stocks (i.e. “buy the dip”). The stocks that best fit all three of these are in fact companies that have just gone bankrupt, like HTZ and WLL. This slowly becomes a self-fulfilling prophecy, as people start seeing bankrupt stocks go up 100% in one day, they stop caring about what stocks have the best fundamentals and instead buy the stocks that people think will shoot up, which are apparently bankrupt stocks. Now, it gets to the point where even if a trader knows a stock is bankrupt, and understands what bankruptcy means, they’ll buy the stock regardless expecting it to skyrocket and hope that they’ll be able to sell the stock at a 100% profit in a few days to an even greater fool. The phenomenon is well known in finance, and it even has a name - The Greater Fool Theory. I wouldn’t be surprised if the next stock to go bankrupt now has their stock price go up 100% the next day because of this.
What is the smart money doing - DIX & GEXAlright that’s enough talk about dumb money. What’s all the smart money (institutions) been doing all this time? For that, you’ll want to look at what’s been going on with dark pools. These are private exchanges for institutions to make trades. Why? Because if you’re about to buy a $1B block of SPY, you’re going to cause a sudden spike in prices on a normal, public exchange, and probably end up paying a much higher cost basis because of it. These off-exchange trades account for about one third of all stock volume. You can then use data of market maker activity in these dark pools to figure out what institutions have been doing, the most notable indicators being DIX by SqueezeMetrics.
Another metric they offer is GEX, or gamma exposure. The idea behind this is that market markets who sell option contracts, typically don’t want to (or can’t legally) take an actual position in the market; they can only provide liquidity. Hence, they have to hedge their exposure from the contracts they wrote by going long or short on the stocks they wrote contracts to. This is called delta-hedging, with delta representing exposure to the movement of a stock. With options, there’s gamma, which represents the change in delta as the stock price moves. So as stock prices move, the market maker needs to re-hedge their positions by buying or selling more shares to remain delta-neutral. GEX is a way to show the total exposure these market makers have to gamma from contracts to predict stock price movements based on what market makers must do to re-hedge their positions.
Now, let’s look at what these indicators have been doing the past week or so.
DIX & GEX
In the graph above, an increasing DIX means that institutions are buying stocks in the S&P500, and an increasing GEX means that market makers have increasing gamma exposure. The DIX whitepaper, it has shown that a high DIX is often correlated with increased near-term returns, and in the GEX whitepaper, it shows that a decreased GEX is correlated with increased volatility due to re-hedging. It looks like from last week’s crash, we had institutions buy the dip and add to their current positions. There was also a sudden drop in GEX, but it looks like it’s quickly recovered, and we’ll see volatility decreased next week. Overall, we’re getting bullish signals from institutional activity.
Bubbles and Market SentimentI’ve long held that the stock market and the economy has been in a decade-long bubble caused by liquidity pumping from the Fed. Recently, the bubble has been accelerated and it’s becoming clearer to people that we are in a bubble. Nevertheless, you shouldn’t short the bubble, but play along with it until it bursts. Bubbles are driven by pure sentiment, and this can be a great contrarian indicator to what stage of the bubble we are in. You want to be a bear when the market is overly greedy and a bull when the market is overly bearish. One of the best tools to measure this is the equity put / call ratio.
Put / Call Ratio
The put/call ratio dropped below 0.4 last week, something that’s almost never happened and has almost always been immediately followed up by a correction - which it did this time as well. A low put / call ratio is usually indicative of an overly-greedy market, and a contrarian indicator that a drop is imminent. However, right after the crash, the put/call ratio absolutely skyrocketed, closing right above 0.71 on Friday, above the mean put / call ratio for the entire rally since March’s lows. In other words, a ton of money has just been poured into SPY puts expecting to profit off of a downtrend. In fact, it’s possible that the Wednesday correction itself has been exasperated by delta hedging from SPY put writers. However, this sudden spike above the mean for put/call ratio is a contrarian indicator that we will now see a continued rally.
TechnicalsMagic Markers on SPY, Daily
With Technical Indicators, there’s a few things to note
My Strategy for Next Week
While technicals are pretty bearish, retail and institutional activity and market sentiment is indicating that the market still continue to rally. My strategy for next week will depend on whether or not the market opens above or below 300. I’m currently mostly holding long volatility positions, that I’ve started existing on Friday.
The Bullish case
If 300 proves to be a strong support level, I’ll start entering bullish positions, following my previous strategy of going long on weak sectors such as airlines, cruises, retail, and financials, once they break above the 24% retracement and exit at the 50% retracement. This is because there’s very little price levels and resistance above 300, so any movements above this level will be very parabolic up to ATHs, as we saw in the beginning of 2020 and again the past two weeks. If SPY moves parabolic, the biggest winners will likely be the weakest stocks since they have the most room to go up, with most of the strongest stocks already near or above their ATHs. During this time, I’ll be rolling over half of my profits to VIX calls of various expiry dates as a hedge, and in anticipation of any sort of rug pull for when this bubble does eventually pop.
The Bearish case
For me to start taking bearish positions, I’ll need to see SPY open below 300, re-test 300 and fail to break above it, proving it to be a resistance level. If this happens, I’ll start entering short positions against SPY to play the price levels. There’s a lot of price levels between 300 and 274, and we’d likely see a lot of consolidation instead of a big crash in this region, similar to the way up through this area. Key levels will be 300, 293, 285, 278, and finally 274, which is the levels I’d be entering and exiting my short positions in.
I’ve also been playing with WLL for the past few months, but that has been a losing trade - I forgot that a market can remain irrational longer than I can remain solvent. I’ll probably keep a small position on WLL puts in anticipation of the court hearing for the disclosure statement, but I’ve sold most of my existing positions.
Live UpdatesAs always, I'll be posting live thoughts related to my personal strategy here for people asking.
6/15 2AM - /ES looking like SPY is going to gap down tomorrow. Unless there's some overnight pump, we'll probably see a trading range of 293-300.
6/15 10AM - Exited any remaining long positions I've had and entered short positions on SPY @ 299.50, stop loss at 301. Bearish case looking like it's going to play out
6/15 10:15AM - Stopped out of 50% of my short positions @ 301. Will stop out of the rest @ 302. Hoping this wasn't a stop loss raid. Also closed out more VIX longer-dated (Sept / Oct) calls.
6/15 Noon - No longer holding any short positions. Gap down today might be a fake out, and 300 is starting to look like solid support again, and 1H MACD is crossing over, with 15M remaining bullish. Starting to slowly add to long positions throughout the day, starting with CCL, since technicals look nice on it. Also profit-took most of my VIX calls that I bought two weeks ago
6/15 2:30PM - Bounced up pretty hard from the 300 support - bull case looks pretty good, especially if today's 1D candle completely engulphs the Friday candle. Also sold another half of my remaining long-dated VIX calls - still holding on to a substantial amount (~10% of portfolio). Will start looking to re-buy them when VIX falls back below 30. Going long on DAL as well
6/15 11:30PM - /ES looking good hovering right above 310 right now. Not many price levels above 300 so it's hard to predict trading ranges since there's no price levels and SPY will just go parabolic above this level. Massive gap between 313 and 317. If /ES is able to get above 313, which is where the momentum is going to right now, we might see a massive gap up and open at 317 again. If it opens below 313, we might see the stock price fade like last week.
6/15 Noon - SPY filled some of the gap, but then broke below 313. 15M MACD is now bearish. We might see gains from today slowly fade, but hard to predict this since we don't have strong price levels. Will buy more longs near EOD if this happens. Still believe we'll be overall bullish this week. GE is looking good.
6/16 2PM - Getting worried about 313 acting as a solid resistance; we'll either probably gap up past it to 317 tomorrow, or we might go all the way back down to 300. Considering taking profit for some of my calls right now, since you'll usually want to sell into resistance. I might alternatively buy some 0DTE SPY puts as a hedge against my long positions. Will decide by 3:30 depending on what momentum looks like
6/16 3PM - Got some 1DTE SPY puts as a hedge against my long positions. We're either headed to 317 tomorrow or go down as low as 300. Going to not take the risk because I'm unsure which one it'll be. Also profit-took 25% of my long positions. Definitely seeing the 313 + gains fade scenario I mentioned yesterday
6/17 1:30AM - /ES still flat struggling to break through 213. If we don't break through by tomorrow I might sell all my longs. Norwegian announced some bad news AH about cancelling Sept cruises. If we move below $18.20 I'll probably sell all my remaining positions; luckily I took profit on CCL today so if options do go to shit, it'll be a relatively small loss or even small gain.
6/17 9:45AM - SPY not being able to break through 313/314 (79% retracement) is scaring me. Sold all my longs, and now sitting on cash. Not confident enough that we're actually going back down to 300, but no longer confident enough on the bullish story if we can't break 313 to hold positions
6/17 1PM - Holding cash and long-term VIX calls now. Some interesting things I've noticed
6/17 3:50PM - SPY 15M MACD is now very bearish, and 1H is about to crossover. I'd give it a 50% chance we'll see it dump tomorrow, possibly towards 300 again. Entered into a very small position on NTM SPY puts, expiring Friday
6/18 10AM - 1H MACD is about to crossover. Unless we see a pump in the next hour or so, medium-term momentum will be bearish and we might see a dump later today or tomorrow.
6/18 12PM - Every MACD from 5M to 1D is now bearish, making me believe we'd even more likely see a drop today or tomorrow to 300. Bought short-dates June VIX calls. Stop loss for this and SPY puts @ 314 and 315
6/18 2PM - Something worth noting: opex is tomorrow and max pain is 310, which is the level we're gravitating towards right now. Also quad witching, so should expect some big market movements tomorrow as well. Might consider rolling my SPY puts forward 1 week since theoretically, this should cause us to gravitate towards 310 until 3PM on Friday.
6/18 3PM - Rolled my SPY puts forward 1W in case theory about max pain + quad witching end up having it's theoretical effect. Also GEX is really high coming towards options expiry tomorrow, meaning any significant price movements will be damped by MM hedging. Might not see significant price movements until quad witching hour tomorrow 3PM
6/18 10PM - DIX is very high right now, at 51%, which is very bullish. put/call ratio is still very low though. Very mixed signals. Will be holding positions until Monday or SPY 317 before reconsidering them.
6/18 2PM - No position changes. Coming into witching hour we're seeing increased volatility towards the downside. Looking good so far
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