Gameplay and Reddit and Melvin.  OH MY!

This morning the Fatman sent me this link to Glenn Greenwald trying to shed some light on the meltdown that some Reddit investors inflicted on Melvin Capital for their obviously obscenely extreme short positions against Gameplay.  And recently he had reminded me of a story I told him about the 1987 Black Monday Wall Street crash that I was involved in.  Back in the mid-eighties photog was a young struggling engineering student working all kinds of crazy jobs to feed his family and looking at an economy that didn’t particularly need engineers.  So, I got my Series 7 license and went to work at a number of different Wall Street firms, some more and some less reputable.  But by 1987 I had been employed at a discount broker taking orders on their options desk for a couple of years and was about to move over to a small specialty firm that handled institutional accounts.  In fact, the week before the crash I had accepted the offer and I would be leaving that next Friday.

Now back then if the Dow Jones Industrial Index dropped fifty points that was a really bad day.  So, as you can tell on Wall Street numbers have changed orders of magnitude in term of impact on the economy.  And the whole Black Monday drop was only 500 points but back then that was an earthquake.  But probably what very few people remember is that the Friday before Black Monday the market dropped a hundred points.  And that was a very big deal.  And for one small investor that first smaller drop was even more important.

Options are a way to bet on the market when you don’t have the wherewithal to buy stock and certainly don’t have the money in your account to be allowed to short a stock.  Back then the equity requirements to short stocks were a lot lower than they are now but still you needed at least 25% of the value in your account to short shares of a stock.  But options are a way to leverage changes in stock price by paying someone who does have stock to guarantee a buy or a sell at a particular price by a particular date.  And as a consequence, a market can then be made in those options.  But since these options expire at a certain date, on that last day if the option price is “out of the money” meaning that exercising the option by buying or selling the stock at that required price wouldn’t make the one exercising the option any money then it is worthless and the option itself has no trading value.  At that point the option trades for almost nothing.

So, every month when various options expired, we’d see the index options, the OEX options, that traded against a basket of blue-chip stocks reach down to the lowest levels they traded at like an eighth or a sixteenth before expiring worthless.  And every month like clockwork we would have a visit from the cabbie.  He was a Jamaican cabbie who would come in with his paycheck and put in a buy order for as many out of the money OEX put contracts as he could get for five hundred dollars.  Five hundred dollars was his paycheck that he would deposit in his account.  And every month he would call up just before the end of the trading day and ask what they were trading at.  And every month we would laughingly tell him that they were worth squat.

But on that Friday before the crash, he bought his options for pennies on the contract and then in the last hour the market went down a hundred points.  And the value of his puts went from virtually nothing to fifty thousand dollars.  And everyone on the trading floor was flabbergasted that the cabbie had pulled off a home run.  So, when he called up and asked for the quote on his OEX puts I respectfully told him.  He told me to sell them at the market price which I did.  But when I asked him if he wanted to have the proceeds sent to him, which I assumed he would, instead he said to buy as many contracts of out of the money OEX puts as I could get.  So, I bought him $50,000 of out of the money OEX puts.  And then the trading desk went wild laughing at this madman who had just flushed the biggest bonanza we had ever seen down the drain.  Because after a 100-point loss, the market would regain the value or at worst hold steady there for a month or two before it continued its way up.  Those puts would slowly erode before expiring worthless.

That night Camera Girl and I joined a friend from the office and his wife at an off-off-Broadway play about, of all things, a stock investor who loses his shirt and kills himself and finds himself in hell.  It was a pretty terrible play.  My friend and his wife were struggling actors who worked other careers to enable their avocation.  And after the play we laughed and talked about the cabbie and how foolish he was but I remember saying to my friend, “Yeah, but what if the market crashed on Monday and went down two hundred points, then he’d have the last laugh.”  And we all laughed at how unlikely that would be.

So, the market tanked Monday and went down five hundred points and the cabbie made some millions.  I didn’t get to speak to him because I was too busy with the fallout of the crash to care about anything but getting through the day.  First, I called my new employer and made sure I still had a new job to go to next week.  Then I slogged through thousands of calls to former investors who would have to liquidate their accounts to meet their margin calls.  It was a crap storm of mammoth proportions that taught me many valuable lessons about the cyclical nature of human endeavors.

But the story of the Jamaican cabbie was an object lesson that combining intelligence and a little luck can accomplish some remarkable results.  I hope that guy took that pot of gold and lived a very happy and useful life.  That kind of luck and courage deserves to be rewarded.

Now back to the Reddit boys.  Regardless of anything else this Gameplay “play” means, it has highlighted just how horrible Wall Street has become.  To relentlessly short a company out of existence is so emblematic of the bloodless inhuman nature of our financial system.  And now that the governmental and industrial powers-that-be are rushing to the defense of one of their fellow vultures it’s plain for all to see that there are two different systems available.  One for the corporate titans that are too big to fail and one for the rest of us who are meant to fail whenever it is necessary to squeeze a little more blood for the vampires to suck.  Maybe it’s a case of the vampires deciding Melvin Capital is just one more victim for their feeding frenzy.  I’m sure honor among thieves is pretty thin.  Or maybe it really is David vs Goliath.  Who knows?  But what is clear is that America is broken.  To the Masters of the Universe in Silicon Valley and on Wall Street we are cattle and slaughtering us is just part of the business cycle.  After all you can always get more cattle.