1988 - 1st Quarter (4)
1988 - 1st Quarter (4)
Now that I had settled the Fidelity matter, it was time for the remaining event: purchasing Koppers.
"It's disgustingly small."
Returning to the BE office, I muttered while looking at the company's financial statements.
No.
Maybe calling it 'small' is a bit off.
Still, it's a large corporation with a market cap over a billion dollars.
'This is strange.'
The problem was that the options had dried up.
There were only about 20 or 30 contracts available on the exchange at most.
"Hmm... So only OTM is left?"
"I was just about to ask you about that."
"About what?"
"What's ITM and what's OTM? I couldn't find it in any book no matter how hard I looked."
Is it because it's not a practical guide?
You'd think that much would be covered.
"Should we get the options straight first then?"
"Yes! I was getting it confused with futures anyway."
Well.
There are things you don't really grasp unless you actually do the trading.
Just reading books, you can only make rough guesses.
"You know the strike price is the mutually agreed-upon amount, right?"
"Agreed-upon?"
"Whether it's futures or options, you're buying a future product at today's price."
"Yes. I know that much."
Ara nodded her head.
Whether futures or options, buying a future product in the present.
"With options, you can agree on a price. Let's take an example. Let's assume you promised to buy a $10 stock for $11 next month."
"Okay."
"But what if the stock becomes $15 on the promised date?"
"Then you buy the $15 stock for $11?"
"Right. If you buy it for $11 and immediately sell it for $15?"
"That's a $4 profit."
The basic principle of options.
Of course, it works a bit differently in reality.
"In reality, you don't necessarily need to pay another $11, receive the stock, and then sell it on the market. It's easier for the bank or exchange to just settle the difference in cash. You can actually pay $11 and receive the physical stock, though."
"I understand up to that point. So, is that $11 the strike price you mentioned?"
"Right. The mutually agreed-upon price. That's the strike price. And the premium is the fee for making that agreement."
"A fee?"
"Because the option seller position has no rights."
Ara's head tilts quizzically.
Did I skip over too much in the middle.
"Should I call it a promise price? The person who paid the money can choose to keep that promise or not. The person who received the money must unconditionally follow the other party's choice."
"Uuum..."
"Think about it the other way. What if the stock you agreed to buy for $11 becomes $9? If you can buy it for $9 on the market, is there any reason to buy it for $11? It's better to break the promise."
"But shouldn't a promise be kept?"
"That's the difference between futures and options. With futures, that promise must be kept, but with options, the buyer can choose to exercise or abandon it."
Ara rubbed her forehead.
Is it complicated?
I thought I explained it in a pretty simple way.
"I understood the content itself."
"But?"
"Then why would the other party make the contract?"
She's curious about why option sellers exist.
"To earn the fee. As an extreme example, what if you sell an option with an $11 strike price for $4?"
"Then even if it becomes $15, they both break even? The person who sold the option already received $4, so even if they sell the $15 stock for $11, they'd have $15 left in hand."
"But if the stock price stops at $12, then the $3 is profit."
"So ultimately, profit and loss are determined by how much that fee is?"
"Generally, yes. That's why the win rate is higher for option sellers. The higher the probability, the more expensive the premium; the lower the probability, the cheaper."
"That makes sense. And the probability is that formula you taught me last time when buying grains?"
I nodded.
No need to explain the Black-Scholes model yet.
Then I'll assume she roughly followed the basics.
"So, Out of The Money (OTM) refers to a strike price that's far from the current price. It's easier to think of it that way."
It's not the exact meaning, but as long as she understands, it's fine.
"So the bigger the difference from the current price, the less premium you pay."
"Add the time value calculation to that, and you get the final premium price."
"Time value?"
"Can a stock go up 10x by tomorrow?"
"I doubt that's possible, right?"
"What about in a year, or ten years?"
"That... might be possible."
"That's time value. The longer the expiration date, the more expensive it gets. Because you never know what variables might come up in between."
"So, the shorter the term and the bigger the difference between the current price and the strike price, the cheaper the premium. The opposite would be more expensive."
Ara nodded.
Seems like she understood enough.
"That's why this OTM thing inevitably has limited volume. If the price is cheap, you have to sell a lot to make a profit, but unlike buyers who only pay the premium, sellers also have to deposit margin."
Since the probability is that low, there are cases where people sell like crazy to get that almost-free premium.
But what if, by one in ten thousand chance, the day comes when that price actually hits?
Due to the loss the company would have to bear, the risk management department usually puts limits on sales volume.
Because if you sell a huge amount of deep OTM and the price hits, the company could go bankrupt.
From a typical trader's perspective, it's an easy, almost free way to add incentive, so they get upset if they can't sell it.
Conversely, the risk management department fights to stop them from selling by any means necessary.
So ultimately, the proportion of OTM in the total option volume has to be much lower than ITM.
Most of the deep OTM appearing on the market should be considered spread volume.
"The problem is the option status of this company, Koppers."
I handed the documents to Ara.
"ITM is similar to the current price, and OTM is far from the current price... Huh? The ITM and OTM quantities are almost similar?"
Anyone can see it's a strange situation.
"Are the sellers being cautious? Because it's risky?"
"That could be, but..."
Well.
I think it might be the opposite.
"What if the OTM volume is as it appears on the market, and someone has been continuously buying ITM call options, making the quantities similar?"
"That could be the case too."
Even if there's some huge issue and everyone expects a rise, the selling of call options doesn't decrease easily.
It's just that the premium price rises sharply.
So if the volume itself has decreased, it's more correct to assume the orders have already been filled.
"Tch."
"What's wrong?"
"Nothing."
I clicked my tongue.
It seems the company trying to acquire Koppers hostilely has already started moving.
'Then this information is useless.'
Looks like I'm a step late.
Not that I could have gotten in much earlier anyway.
I didn't really know much about this company called Koppers other than having heard of it, and the capital I had was too small to begin with.
When I could barely handle Nikkei futures, Fidelity, and Firestone, what was Koppers?
"You can leave for today if you want."
"Is that okay?"
"I told you earlier."
"Thank you."
Ara bowed her head.
Looking at her expression, I can't see any feeling of gratitude at all, so why can I sense that emotion?
Is it because we mix bodies every night?
"I'll be going then."
"Yeah."
Well, what can I say.
It feels strangely embarrassing when she talks as if this place is her home.
Well, we are living together, so...
'That aside...'
After seeing Ara off, I looked at the clock.
The market should still be open.
It'll close soon, though.
Then I should just place the order and leave too.
"Hello?"
I called Merrill Lynch.
Koppers is in a situation where bulk buying or derivative trading is impossible.
So big profits are out of the question, and I was thinking of making a modest profit with my personal account.
The expected return is roughly 25~30%, maybe?
The area where buying pressure for the strike price decreases is around there, so I can think of it as aiming for a tender offer at that price.
- This is Diana from the Retail Department. How may I help you?
"It's Arthur. Diana."
- Ah! Arthur-ssi!
Diana responded with a bright voice.
The balance in the CMA account had only been decreasing.
Most of the credit cards and checks I use are linked to that account.
Living expenses, of course, and the plane, island rental, hotel, etc., used in the Bahamas were all paid from that account.
Not that I made any special investments; I just put it in RP, so from her perspective, she might have thought I was just winding down the account.
We did talk on the phone every few days, though.
"I want to buy some stocks."
- Which one?
"Koppers."
- Oh my?
She let out a gasp as if surprised.
Probably among the banks, they sensed the strange currents earlier than I did.
Seeing that it reached even the Retail Department, I'm definitely very late.
- Options again this time? But Koppers is...
"There won't be any option volume, right?"
- Did you know? Do you happen to know the reason too?
"No. I have my guesses, though."
- I see...
"Don't you know better than I do?"
- No. We can't even guess right now.
That's unexpected.
For it to have come in so dispersed that even the bank can't guess its identity.
I don't know which company it is, but they seem to be using a quite skilled broker.
- So you're only buying stocks? How many shares will you go in for?
"Within five ticks up or down from the current price. The budget is one million dollars."
- Huh? The balance is only 120,000 dollars.
"Please buy them for now. On margin. I'll deposit the 880,000 dollars tomorrow."
If I call the bank to transfer to my Miami account, then send it to Delaware, then send that to Merrill Lynch and place the order, today's market would be pretty much over.
Fifteen minutes before the market closes.
Not enough time to absorb the sell orders.
The orders might not be overflowing, and seeing that they've absorbed all the options, they'll probably announce a tender offer soon.
So I need to get in as soon as possible, even a day earlier, to make a profit.
- Even so, the margin is too large compared to the collateral.
"Is it difficult?"
- ...Understood. The margin fee is 10%.
Roughly 270 dollars per day?
Retail is disgustingly expensive, as expected.
No matter it's a margin trade, what kind of 10% is this, really.
They'll take order fees on top of that.
- You will definitely deposit the margin call tomorrow, right?
"Of course."
- Phew-. Normally, it wouldn't be allowed.
Well, they can't know how much capital my family office has, so it's natural.
Not that I'm an asset holder famous enough that just mentioning my name would mean anything yet.
- Instead, could I see you today?
"Huh?"
- I'd like you to sign a simple letter of commitment for the deposit.
"I'll come over there now."
- Ah, no. I'd like to place the order first and meet after work. Would that be difficult?
After work.
A personal meeting to manage the client while also getting a letter of commitment to prepare for any internal breaking points.
If I can deposit a million dollars, then client management it is.
If she judges today that I won't be able to deposit the million dollars, she'll force-liquidate immediately.
The letter of commitment is probably to prepare for pressure from her superiors.
Typical Diana.
Even while investing, she has a tendency to eliminate risk factors one by one.
Wanting to take the profit while reducing risk—the typical attitude of a Wall Street bastard... no, bitch.
"It's possible. Then would you like to have dinner together?"
- ...Are you inviting me?
"If you're busy, just signing the documents is fine too."
- No. I have plenty of time. Then let's meet after work, at 6.
"Please place the order as quickly as possible first. It would be best if it could be completed today."
- Leave it to me.
And so, we simultaneously confirmed both the dinner appointment and the buy order.