CC and I want to take the opportunity to introduce an addition to the RiskReversal.com team that we think will be transformative for our product as we enter our second full year of the service. Enis Taner joins us from Goldman Sachs where he spent the last 4 years trading the firm’s Financials Sector Equity Options book, from both a customer market making role, and from a proprietary trading standpoint. While Enis will have a particular focus on analyzing, writing about and articulating single stock stories in North America, he will also be charged with scanning the globe for the second derivative trade, whether it be one initiated from an event here or abroad. Enis will take on the title of Global Macro Editor of RiskReversal.com, which aside from his frequent trade ideas on individual stocks, will have a strong focus on global etf’s and indices. We are very excited for Enis to join our team and we look forward to the opportunity of broadening out RiskReversal’s offering on a daily basis, both in the quantity and quality of the content that we produce. - Dan
So I assume you are all a bit bored of my daily bearish missives anyway by now, so without further delay, Enis Taner’s first post on RiskReversal.com:
First off, it’s a privilege for me to work with Dan, CC, and Kristen on RiskReversal. I met Dan at Merrill Lynch before he became a big TV star, and I’ve always had a lot of respect for him as a trader (though his basketball skills need work). In my mind, education and discipline are the 2 most important areas to develop for any trader or investor, and I look forward to contributing to RiskReversal in a similar vein.
There are three main themes that led me to a career as an options trader:
1) The fallacy of Buy and Hold
I took my fair share of economics courses in college, for better or for worse. In a macroeconomics textbook, one table about global stock markets caught my eye back then, and I’ve thought about it ever since. It showed the performance of stock markets around the world in the 20th century. The U.S. was by far the clear winner, but many other markets (like Russia and Italy) had annual performance of less than 2%. I started trading stocks in high school, and had read plenty of books and research about the long-term advantage of investing in stocks by that point, and the large majority of them used the period of (1929-present) in the U.S. as the time and place of study. Part of that was due to data availability, and also the fact that financial companies funded a good portion of finance research, but it was still a huge selection bias. It hit me that all of that research was based on a 75-year period of exceptional performance in the best stock market in the world!
To illustrate this point, here is a great pie chart from Investopedia, taken from the book Triumph of the Optimists: 101 Years of Global Investment Returns:
The U.S. and Japan are the obvious winners. But imagine that you had invested in Russia or India. You would have been better off in bonds. I can already hear the cries of disagreement in response, “But Russia had communism!” “Italy had Mussolini!” “The U.S. is the leader of free markets!” I acknowledge that there are good reasons for the success of U.S. markets in the past. But circumstances change, and much of academic research is based on a very favorable time in history for U.S. economic prowess. I prefer to focus on the more uncertain future, and like to trade and invest more nimbly as a result.
2) You need multiple ways to win
It’s often said that great traders only need to be right 51% of the time, or that the casino’s edge of 51% is sufficient. First, there are many great traders who are only right 25% of the time, but their winners are much greater than their losers. Second though, and more importantly, the beauty of options is that we don’t always have to guess the right direction. We can design options structures that make money if the stock stays within a certain range, moves outside a given range, does not move until a given maturity and then moves a lot; in other words, the flexibility options offer is obvious. The key is to find the rare risk/reward opportunities that are the “fat pitches” of this business.
3) Process over outcome
Here are 2 stories to explain what I mean.
1) Back in the summer of 2007, I was running a routine screen to find stocks whose options were too cheap in the materials sector. Chapparal Steel was one of several names that screened as having cheap options, and I went into the market and bought short-dated straddles and strangles on it and the other names. Shortly afterwards, Gerdau Ameristeel announced that it was buying Chapparal Steel, and I had a huge winner on my hands, making almost $1m for my firm’s portfolio. A few of the traders on our desk had never even heard of Chapparal Steel. The trader next to me offered the classic trader’s line, “Better to be lucky than good.” In this case, the outcome was better than what the process would predict.
2) In January 2008, I was short some MON options that I was comfortable leaving short because the options screened objectively expensive. Well, I was caught in the buzz-saw of a big market swoon, and lost almost $2m for my firm’s portfolio. We all later learned that that big market swoon was likely caused by Societe Generale unwinding Jerome Kerviel’s rogue positions. I was dramatically reproached and reprimanded by my managers, when in reality it was just that the outcome was much worse than what the process would predict.
Over time, we should focus on putting on good trades, not solely judging the trade by whether it made money or not. I learned that I shouldn’t be looking for the next Chapparal Steel, but I also shouldn’t be in constant worry over the next Monsanto. Rather, I should focus on the process of good trade selection, and trust that the odds in my favor should work out in the long run.
Please feel free to contact me at Enis@riskreversal.com, and if anyone is ever looking for a backgammon lesson, that’s fair game too.