Options are like Amoebas.
At least, they were in 1973 when the “derivatives” business was single-celled, a simple zygote prior to mitosis. Not a naturally-produced zygote, but a synthesized, contagious “test tube baby,” genetically altered with “financial Ebola” to poison global markets, destroy cultures, and inflict DEATH via bankruptcy.
Oh the simple days of college, when a naïve, ambitious, 20-year old RANTING ANDY was taught the “Black-Scholes” option pricing model, utilizing a stupid formula to attempt the transformation of living, breathing objects like stocks into rigid automatons.
Attempting to “value” options with a formula is akin to defining the primary enigmas of classic philosophy – LIFE, LOVE, and TRUTH. In other words, there is no way to shoehorn option valuation into a formula, as such value can only be determined by the beholder. Yes, you can “value” the time left on an option, but time value has the same fatal flaw as most cash flow analysis. That is, the “discount rate” is completely and utterly dependent on arbitrary assumptions amidst fluid market conditions.
Statistically, the odds of profiting from a long options position are about the same as that of a typical Wall Street M&A deal being a success; FAR BELOW 50%!. The reason, of course, is BOTH mergers AND options contracts were created by CRIMINAL Wall Street banks, with the sole purpose of stealing your money. At least in Las Vegas, chance occasionally works in your favor, but in challenging the Wall Street-rigged markets, you will ALWAYS lose.
By now, it should be painfully clear the world rewards fraud, amorality, and sloth, particularly in New York City and London, the two cities most responsible for the GLOBAL financial catastrophe unfolding before our eyes. TBTF banks are bailed out and criminal politicians re-elected, while the growing “welfare society” frowns on those supplying its needs, but embraces the rights of the worthless. Just like Atlas Shrugged, but in REAL LIFE.
Black and Scholes were given Nobel Prizes for this formula, which more than any in the global economic realm has caused misery, pain, and losses for the unsuspecting public, at the hands of ruthless sociopaths running Goldman Sachs, JP Morgan, and the like. When retail traders lose their life’s savings in rigged markets they are left penniless, while Goldman Sachs and JP Morgan are bailed out from their mistakes with freshly printed, tax-payer funded capital, the reward for channeling years of illicit profits into campaign contributions.
The Black-Scholes model was immediately embraced by salivating New York mafia dons, and immediately after its 1973 publication, Wall Street created the Options Clearing Corp, or OCC, enabling the spin-off of the Chicago Board Options Exchange, or CBOE, from the Chicago Board of Trade. Back then, option contracts on just 16 stocks were traded, rising to a still modest 68 stocks in 1980.
The options business remained nascent, but when the stock market’s 20 year stagnancy ended in 1981, simultaneous with the emerging “Computer Age,” Wall Street smelled fresh blood. At that point, the cancerous “financial engineering” cult was born, with its first victim the SINGLE-CELLED OPTION. Thus, in 1983 the first “second derivative security” was born, the Index Option. Now investors could bet on financial indices themselves, which in turn were bets on the cumulative direction of their individual components. Back then, just three options exchanges existed – in Chicago, Philadelphia, and New York – and essentially all options business was left to “professionals” trading with house money. Betting incorrectly might cost you your job, but not your personal finances. The house could always absorb the losses, which were limited by the then small market size.
However, as the 1981-1999 bull markets gained steam, and Wall Street more powerful, new classes of investors were born, particularly MUTUAL FUNDS that relied on equity and fixed income indices to limit “alpha,” and thus seek protection in numbers. Hedge funds also joined the party, yielding exploding interest in index investing, and with the growing size of such investment pools came increased acceptance of index options to “hedge risk.”
Index options were so successful, particularly calls as they became tremendously profitable during the 18-year bull market, that Wall Street grew far richer and stronger, hungry for “fresh meat” to satisfy its fee-generating appetite. Consequently, in 1990 “LEAPs”, Long-Term Equity AnticiPation Securities, were introduced, yielding larger premiums due to their longer-terms, and thus higher Wall Street fees. I suspect millions in LEAP contracts became worthless in the early 1990s mini-bear market, billions in the early 2000s “Tech Wreck,” and trillions since Global Meltdown I commenced in mid-2008.
Unfortunately, the first 20 years were just a prelude to the CATASTROPHIC financial damage of the next 20, when Wall Street commandeered the U.S. government and mastered the art of pilfering the public. By 1996, the Federal Reserve-led equity bull experienced meteoric growth in online investing, driven, of course, by the rapidly expanding tech bubble. Cab drivers became self-professed experts on Cisco, Intel, and Microsoft, while savvy money managers became aware of the terms “B2B” and the “internet.” Schwab, Ameritrade, and E-trade became household names, yielding the dawn of “day-trading” and similar risky financial activities amongst the naïve public.
Wall Street utilized the combination of rising stock prices and public market participation to create its own trading platforms, far more expensive than “discount brokers” but potentially more lucrative, offering hundreds, then thousands of exotic trading alternatives, including a broad swath of “derivative” securities such as stock options, index options, and LEAPs. The tech bubble fueled this growth like kerosene on a fire, and by the year 2000 “derivative contracts” became ubiquitous in both the retail and institutional realms, with millions of option-derived contracts trading on thousands of equity, fixed income, and other securities.
Enter the Glass-Steagal repeal.
By 1999, Alan Greenspan’s mad scientist experiment in the emerging field of “hyper-monetary policy” had created a tech bubble so large that Wall Street became rich enough to literally take over the world. And I should know, as I spent that time working as a sell-side analyst at Salomon Smith Barney in New York City. Cumulatively, Wall Street profits grew so large, it was inevitable they’d use them to purchase political favor, if not cabinet positions themselves. In hindsight, Bill Clinton’s appointment of Robert Rubin as Treasury Secretary in 1995 was the “shot heard round the world” in the annals of banker/politician commingling.
In reality, Ronald Reagan started this trend in 1981 when he hired Donald Regan as Treasury Secretary, directly from his CEO position at Merrill Lynch. But Wall Street was not rich and powerful in 1980; to the contrary, it struggled through the throes of a vicious recession and decades of stagnant stock prices. Conversely, in 1995 Wall Street was on the rise, and Clinton’s hiring of Goldman Sachs’ CEO harkened a dangerous era in which powerful sociopaths, with an agenda directly in conflict to its constituents, had taken power.
Immediately, Rubin spearheaded an effort (behind the scenes, of course) to bolster the power of his “peeps” in New York, clearing the way for repeal of the Glass-Steagall Act in 1999. Glass-Steagall, one of the best laws EVER created by Congress, emerged from the Great Depression, prohibiting the commingling of investment and commercial banking activities. A root cause of the 1929 crash and 1930s Depression was bank profligacy with depositor funds, and Glass-Steagall’s raison d’etre was the removal of such blatant conflicts of interest. Thus, when it was repealed in 1999, it was like issuing Wall Street a “license to kill.”
By then, the SINGLE-CELLED OPTION had divided several times, becoming significantly more complex and differentiated. Not only was it growing, but thanks to the exponential learning curve of Wall Street’s “financial engineers,” was being injected with “derivative steroids” in increasingly large doses. Options were exciting “games” for small investors, but futures were more lucrative because they could be used to manipulate entire markets. Not surprisingly, today’s covert, virulent Gold Cartel (as opposed to the more overt, benign version of the 1960s London Gold Pool) was born, as were numerous manipulative organizations, particularly an amped-up, omnipresent incarnation of the “President’s Working Group on Capital Markets.”
In other words, Wall Street learned that REAL profits were not earned by successful trading markets, even with the leverage afforded by futures and options, but to manipulate the markets themselves with multi-layered derivative instruments. Now that Wall Street has successfully bought its first President, George W. Bush, the sky was the limit as far as the capital – political and financial alike – that could be committed to such endeavors.
Around that time, “over-the-counter” derivatives were dreamt up by the cleverest, yet most amoral, of the financial wizards. Not only could markets be manipulated with second and third derivative financial products such as exchange-listed “options on futures”, but via unlisted, off-exchange products traded by “dark pools,” i.e. unregulated, opaque, virtually untraceable funds with ambiguous sources of funds and equally ambiguous agendas.
Thus, the birth of “Weapons of Mass Financial Destruction,” the very same “derivatives” that plaster the news pages each day when referring to the root causes of today’s GLOBAL financial collapse. To this day, fewer than a handful of people, including those that use such products, have any idea how such “derivatives” function, much less the daisy chain ramifications of their failure.
The table below depicts the meteoric growth of “OTC derivatives” from the time Glass-Steagall was repealed until 2008, when the market rose from virtually nothing to more than $600 TRILLION in notional value. Current estimates suggest this market is somewhere between $800 TRILLION and $1 QUADRILLION, but it is difficult to generate a truly accurate figure due to the lack of transparency, particularly in attempting to “net” the myriad cross-exposures of various banks.
Despite this “business” being proved to be outright, lethally dangerous FRAUD by the all-out collapse of the world’s largest OTC derivative guarantor, AIG, it continues to grow, estimated to have grown by 15% in just the first half of 2011 alone (2H 2011 figures have yet to be released). U.S. taxpayers funded the “derivative bailout” through inflation, as the insolvent Federal Reserve was forced to print trillions of dollars to make whole the counterparties to failed derivative contracts with AIG, Fannie Mae/Freddie Mac, Lehman Brothers, and others, both on and off the radar screen, and is obviously be the “buyer of last resort” for any and all future failures.
Once Wall Street had fully poisoned the U.S. financial markets, it expanded its reach into municipalities such as Jefferson County, Alabama, which recently filed the largest ever Chapter 9 bankruptcy filing thanks to toxic derivative contracts sold to it by JP Morgan, and ultimately the U.S. government itself, via the Federal Reserve. Consequently, the Fed no longer utilizes “standard monetary policy” such as daily repurchase agreements through its New York office, but complex, “off balance sheet” swap and lease activities that all but a tiny handful of “elites” on earth are cognizant of.
Finally, after it had cast its evil, irreversible spell on the entirety of America, Wall Street injected its financial cancer overseas, luring unsuspecting countries into the derivatives trap with promises of “free profits” and “financial independence,” much as it did to Jefferson County, Alabama. The earliest adopters were naïve “rubes” such as Iceland and Greece, but ultimately ALL of Europe was sucked in, and thanks to the unbreakable chains of interdependence, there is NO WAY to free oneself outside of outright default, yielding higher interest rates, hyperinflation, political upheaval, and ultimately, WAR.
THIS is the current state of the world, and NOTHING will fix it – EVER. The inevitable result is catastrophic, unmitigated collapse of the largest financial HOUSE OF CARDS in global history. Only EXPONENTIAL money printing growth will keep it alive, but the more toilet paper that enters circulation, the quicker the onset of HYPERINFLATION. Once this contagion is unleashed, which I now believe will go GLOBAL – even in China – it will be clear to ALL sentient beings that ONLY a gold standard will enable the financial world to be reborn, and ultimately saved.
In today’s dollars, my price target for gold is, at a minimum, $15,000-$20,000/ounce to simply account for OVERT money printing in the United States alone, and for silver, a ratio to gold of no more than 1:15. However, today’s dollars are depreciating rapidly, yielding a real, growing possibility of hyperinflation, in which circumstance the “price” of Precious Metals will be immaterial compared to the necessity of simply OWNING them.
Since the unnatural fertilization of the SINGLE-CELLED OPTION in 1973, nearly to the year Nixon abandoned the gold standard in 1971, the derivatives business has essentially grown infinitely. Fortunately, it now feeds SOLELY on PRINTED MONEY, which is becoming “scarce” due to increasingly rapid devaluation. In the ultimate “Catch-22” dilemma, the more fuel it consumes, the less energy it receives, until eventually the fuel no longer sustains life.
Thus, the “derivatives monster” has become too large and unwieldy to survive, thus rapidly nearing its death, and with it the current global financial system. They say it is impossible to remember one’s experience within the womb. Fortunately for future generations, the experience of the initial SINGLE-CELLED OPTION is forever preserved for posterity.
PROTECT YOURSELF, and do it NOW!