In two of our January commentaries, we discussed some fundamental reasons that make us skeptical of a continuous market upswing, as well as some reasons that make us consider a continuous selloff as an opportunity to acquire some solid names at cheaper prices.
For the last few years, an income-enhanced tactic of selling Puts on names that we believe have solid financials – and which we would like to have at lower valuations – has been working pretty well for us. Under the current market circumstances where volatility and risks are rising, we are of the opinion that a tactical move of buying call options (again on names with solid financials and which we desire to own at pre-determined strike prices) financed by selling Puts (on the same names) could represent a win-win move of income and portfolio enhancement. When we tested the waters, we found some encouraging results.
In the evolving chessboard of geopolitics, insecure leaders feel the need to portray “power” and make themselves relevant. A leader with no insecurities doesn’t have the need to show that s/he can influence the balance of power. On the contrary, an insecure one with limited understanding of how the balance of power historically evolves may try through violent means to establish herself/himself as an important player. Welcome to the current situation in Ukraine. We are dealing with a shrinking Russia whose economic importance keeps diminishing, as seen below.
Putin has been trying to sell the world a geopolitical Put because of his insecurities and diminishing status. The problem for him is that the West has not only been buying his Puts (which would empower Putin by giving into his absurd demands), but the West has also been selling calls, in terms of stating unequivocally that the result of a miscalculated invasion into Ukraine would devastate Russia economically as well as financially. Let’s put it simply: Putin’s Put has been called and the result is that no matter what he does, he will lose. A rational person would recognize the conditions of self-entrapment and would try to save face, otherwise the proud people of Russia with such rich history will witness an embarrassing economic and financial ruin from which may be difficult to recover, unless they fully embrace a democratic government where bullying and corruption are buried.
Putin may try to play the China card, and China may fall into that trap (by buying long but unsustainable Calls) which will prolong the expiration date of the Puts and Call options. However, given that the fundamentals are so weak, such a play will be a lose-lose proposition for China too, which may endanger not just its geopolitical status in the balance of power, but also its economic one given that its growth model will simply be devastated. At the end, and after a lot of blood will be shed, Sun Tzu’s principle of “winning without fighting” will have been completely violated.
Mistaking (in)puts for outcomes was the underlying cause of the defeat for the axis powers in World War I. A secure power opts for deterrence and war avoidance and knows that no rival power can get its way/prevail over her, simply because it knows it can win the war. In military terms, this is known as the kill chain. In the financial field of options, it involves the three same steps that the kill chain includes in the military field. First, you have a clear understanding of the situation; Second, you know what you will do and have alternative plans just in case (e.g., rolling over the options); Finally, you execute a decisive plan. Bottom line: Breaking the opponent’s kill chain converts an uncertain situation into a win-win strategy.
Some believe that the unipolarity of the 1990s and early 2000s (when the US was the only superpower) is trending to be replaced by a peculiar (but unstable in my humble opinion) multipolarity. Such trend is unsustainable because the economic and financial foundations are weak, and therefore either those who aspire to be players in a game of great power rivalry have to play the war card, or have to learn to be team players in a game where a hyperpower establishes the rules. That will be a win-win situation.
Putin’s Puts and Xi’s Calls have a common denominator: They fail in their imagination about the future that the Day After brings with it. The failure of imagination can only produce a new Tower of Babel where the players cannot communicate with one another. At the end, oppressed people will revolt because the “man doesn’t live by bread alone.” The demands of the present do not necessarily compete with the needs of the future. Seeing the present as a zero-sum game is a recipe for enslavement into a reprehensible past that people rejected.
Embracing the future has nothing to do with the last days of February 2014 when Putin’s “little green men” (Russian soldiers masked and wearing green uniforms) were invading Ukraine and seized Crimea. Nowadays, the Tower of Babel will extend to electronic warfare systems, communication jammers targeting Russian equipment including warheads. However, if Russia chooses to continue down the dangerous line of the “Gerasimov doctrine” (military means of concealed character, including subversion, misinformation, social media propaganda, cyberattacks and assassination), then realism dictates that it will be paid back proportionally, and the battlefield will be everywhere, and not just in the economic and financial domains.
When Machiavelli published The Prince in 1532, he envisioned a transformational leader who takes a territorial princely state and transforms it into an imperial nation-state which eventually will become an industrial nation. The application of this Machiavellian thought into the contemporary scenery requires the transformational leader to control fortuna (fate/destiny) by exercising virtue. Machiavelli advises his Prince that the leader’s ingenuity and enterprise resemble the levies that control the flow of the mighty river called historical evolution, but improvising might be necessary even if that includes the suspension of the values that aspire the leader, when malevolent circumstances call for. Machiavelli foresaw the transition from a feudal order to a modern state which demanded the application of new rules.
Getting ambushed by the future is an unforgivable mistake. Kodak was ambushed by the future, and so was a number of other companies from Sears to Blackberry. Portfolio alpha demands a kill chain with options, and geopolitical alpha demands embracing the Day After which in turns seems to be saying: “Go ahead, make my day.”
Put(in)s and Calls and Getting Ambushed by the Future: A Machiavellian Win-Win Strategy in the Midst of Market and Geopolitical Turmoil
Author : John E. Charalambakis
Date : February 1, 2022
In two of our January commentaries, we discussed some fundamental reasons that make us skeptical of a continuous market upswing, as well as some reasons that make us consider a continuous selloff as an opportunity to acquire some solid names at cheaper prices.
For the last few years, an income-enhanced tactic of selling Puts on names that we believe have solid financials – and which we would like to have at lower valuations – has been working pretty well for us. Under the current market circumstances where volatility and risks are rising, we are of the opinion that a tactical move of buying call options (again on names with solid financials and which we desire to own at pre-determined strike prices) financed by selling Puts (on the same names) could represent a win-win move of income and portfolio enhancement. When we tested the waters, we found some encouraging results.
In the evolving chessboard of geopolitics, insecure leaders feel the need to portray “power” and make themselves relevant. A leader with no insecurities doesn’t have the need to show that s/he can influence the balance of power. On the contrary, an insecure one with limited understanding of how the balance of power historically evolves may try through violent means to establish herself/himself as an important player. Welcome to the current situation in Ukraine. We are dealing with a shrinking Russia whose economic importance keeps diminishing, as seen below.
Putin has been trying to sell the world a geopolitical Put because of his insecurities and diminishing status. The problem for him is that the West has not only been buying his Puts (which would empower Putin by giving into his absurd demands), but the West has also been selling calls, in terms of stating unequivocally that the result of a miscalculated invasion into Ukraine would devastate Russia economically as well as financially. Let’s put it simply: Putin’s Put has been called and the result is that no matter what he does, he will lose. A rational person would recognize the conditions of self-entrapment and would try to save face, otherwise the proud people of Russia with such rich history will witness an embarrassing economic and financial ruin from which may be difficult to recover, unless they fully embrace a democratic government where bullying and corruption are buried.
Putin may try to play the China card, and China may fall into that trap (by buying long but unsustainable Calls) which will prolong the expiration date of the Puts and Call options. However, given that the fundamentals are so weak, such a play will be a lose-lose proposition for China too, which may endanger not just its geopolitical status in the balance of power, but also its economic one given that its growth model will simply be devastated. At the end, and after a lot of blood will be shed, Sun Tzu’s principle of “winning without fighting” will have been completely violated.
Mistaking (in)puts for outcomes was the underlying cause of the defeat for the axis powers in World War I. A secure power opts for deterrence and war avoidance and knows that no rival power can get its way/prevail over her, simply because it knows it can win the war. In military terms, this is known as the kill chain. In the financial field of options, it involves the three same steps that the kill chain includes in the military field. First, you have a clear understanding of the situation; Second, you know what you will do and have alternative plans just in case (e.g., rolling over the options); Finally, you execute a decisive plan. Bottom line: Breaking the opponent’s kill chain converts an uncertain situation into a win-win strategy.
Some believe that the unipolarity of the 1990s and early 2000s (when the US was the only superpower) is trending to be replaced by a peculiar (but unstable in my humble opinion) multipolarity. Such trend is unsustainable because the economic and financial foundations are weak, and therefore either those who aspire to be players in a game of great power rivalry have to play the war card, or have to learn to be team players in a game where a hyperpower establishes the rules. That will be a win-win situation.
Putin’s Puts and Xi’s Calls have a common denominator: They fail in their imagination about the future that the Day After brings with it. The failure of imagination can only produce a new Tower of Babel where the players cannot communicate with one another. At the end, oppressed people will revolt because the “man doesn’t live by bread alone.” The demands of the present do not necessarily compete with the needs of the future. Seeing the present as a zero-sum game is a recipe for enslavement into a reprehensible past that people rejected.
Embracing the future has nothing to do with the last days of February 2014 when Putin’s “little green men” (Russian soldiers masked and wearing green uniforms) were invading Ukraine and seized Crimea. Nowadays, the Tower of Babel will extend to electronic warfare systems, communication jammers targeting Russian equipment including warheads. However, if Russia chooses to continue down the dangerous line of the “Gerasimov doctrine” (military means of concealed character, including subversion, misinformation, social media propaganda, cyberattacks and assassination), then realism dictates that it will be paid back proportionally, and the battlefield will be everywhere, and not just in the economic and financial domains.
When Machiavelli published The Prince in 1532, he envisioned a transformational leader who takes a territorial princely state and transforms it into an imperial nation-state which eventually will become an industrial nation. The application of this Machiavellian thought into the contemporary scenery requires the transformational leader to control fortuna (fate/destiny) by exercising virtue. Machiavelli advises his Prince that the leader’s ingenuity and enterprise resemble the levies that control the flow of the mighty river called historical evolution, but improvising might be necessary even if that includes the suspension of the values that aspire the leader, when malevolent circumstances call for. Machiavelli foresaw the transition from a feudal order to a modern state which demanded the application of new rules.
Getting ambushed by the future is an unforgivable mistake. Kodak was ambushed by the future, and so was a number of other companies from Sears to Blackberry. Portfolio alpha demands a kill chain with options, and geopolitical alpha demands embracing the Day After which in turns seems to be saying: “Go ahead, make my day.”