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Hey, everybody, this is Life
is a Gamble episode number four Blair Hull.

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Before I get to that, just
a couple of announcements. I want

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to remind people that if you are
hearing this on the old gambling with an

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edge stream, please change over to
the Life is a gamble stream because eventually

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it will not be going out in
both places. So this applies to people

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who are using a podcast app like
iTunes or Spotify. So yeah, just

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switching on over and that way you
won't miss anything when the new episodes come

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out. Okay, now here's the
show. Okay, so i'd like to

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well, first of all, let
me start here. Welcome Blair Hall to

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Life as a Gamble. Thank you, it's good to be here. So

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I want to start in nineteen eighty
seven and the markets are crashing, and

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you are on the Chicago Board of
Options Exchange at that time, or were

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you in the Pacific. We had
a market maker operation that was operating in

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Chicago and the Chicago Board of Options
Exchange, but we also had traders in

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New York at the American Stock Exchange
also, and we had a presence on

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the New York Stock Exchange. So
we were guilty dealing with multiple markets here,

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I see, and so could you
just paint a picture for an audience

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of what this crash was like and
what happened. Well, nobody expected this.

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The markets had been retreating for some
time a few weeks before. Nobody

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expected this time in correct, and
what happened was everybody was completely in panic.

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Moote. We were on the Chicago
Board of Options Exchange where we were

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actually the primary market maker in the
SPX options on that day. The X

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in those days they has changed.
The primary market maker would be one firm

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on one day at another firm on
the other day. There were actually four

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firms were primary market makers, and
so it was our responsibility to put up

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quotes for the S and P five
hundred options. And I was in that

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pit that morning. The FED had
actually increased the requirements for market makers and

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customers. They increased the margin requirements
at that time, which was a big

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mistake because that means that even the
market makers and the professionals were paneled.

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We had a position in the major
market index at the Board of Trade,

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which he was at twenty stocks in
it. It was really a mirror of

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the Dow Jones average, and it
was the futures market. At the Board

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of Trade. We had a big
position. I was the only member of

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the firm that had a full Board
of Trade seat. So I actually went

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that morning over to the Board of
Trade after I think it was a half

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an hour into the market and we
realized that we needed to buy backs of

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the futures contracts, and so I
went over to the Chicago to the Board

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of Trade to trade to trade that
contract. So everybody was in panic mode,

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and basically everybody wanted to sell and
nobody wanted to buy. But you

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were required to make a market,
right, Yes, you're required to make

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a two sided market in the options
market and the futures market too, and

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so and we had operations in New
York and Chicago, both in the futures

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and options and stocks, so we
were trying to trade these all against each

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other. But at the same time
we had extreme capital requirements too, so

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it was a very it was a
very tense. Yeah, so it sounded

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like a very risky time. And
I guess from your background in blackjack,

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it was all about mitigating risk.
Well, it was. It was trying

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to get an advantage and then stay
in the game to make sure your bets

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are properly you have the proper size
size wager. At any one time,

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I went over to the order trade
and there were just completely all sellers.

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That was the only and we actually
had a short position in the major market

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index. So I was buying in
five lots. And suddenly at about while

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somewhere around nine thirty in the morning, there were rumors that the New York

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stock is James with halt and the
Chicago merket deal Hall Chicago Merkentiel was the

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more important market because it was the
futures market. And if the Chicago Mercantiel

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halted with our markets had closed,
it was a complete catastrophe. I then

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asked my firm to go investigate what
is happening. Happened on trading halts,

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and of course this is sort of
ridiculous, because how do we we were

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a small firm, we have nineteen
people. How do I get somebody to

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go to the library? You had
to go to the library in those days,

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it was before Google, and so
that was sort of ridiculous. At

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about ten thirty, I said,
I told I told the firm to be

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long on the hall because we anticipated
there would be a halt of the markets.

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And just before that, Drexel Burnham
comes in with a very large cell

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order, and because I'm the only
buyer in the pit, he whispers to

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me, where will you make a
market for a hundred contracts? We had

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been trading in five lots, so
I gave him a ridiculously low bid and

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he said, you own them.
I completely panicked, or is this is

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much larger trade than I should have
taken? And then and then the market

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trade slightly higher, and he says, I'll sell you another fifty I bought

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him. I had intended to share
some of those contracts that were at a

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very good price with my fellow traders. I didn't do that though, actually,

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and the market went straight up from
that point really, So that was

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the eighty seven crash. And I
was just in the right place at the

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right time, with the right well
and you kept your head when other people

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did not. Well. It was
quite fascinating because even the usually when you

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have tremendous buy and then volatility,
the pits are crowded. In this case,

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even the traders, the local traders
panicked. They went there, they

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went to their banks and got cash, and they took cash and went on

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vacation because they were scared to death. So it's the only time I've ever

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seen in the markets. It's usually
when there's a lot of activity, there's

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a lot of greed in the market. This case was hear wow. And

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did you find that that served you
well moving forward that when there was a

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lot of fear in the market,
that was a good thing for you.

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Well, this was such a unique
situation, but there's no question that when

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there when there is fear and there's
a lot of volatility and a lot of

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a lot of movement, there's more
money to be So I want to talk

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about another really large gamble you made, and that was deciding to run for

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public office. So this is now
some years later. You had sold your

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company right at that the crash was
in eighty seven, and I sold a

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Goldman Sachs came in and made an
offer for our firm that was very hard

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to refuse. We were about to
go public as a publicly traded company in

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nineteen ninety nine, and we actually
were about to go on a road show,

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and so we were to have a
public offer, which could be an

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IPO, and Goldman looked at the
numbers and then said no, I don't

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think you should do that. We
should pay you a premium. It would

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have gone public. I think at
about a three hundred and fifty million dollars

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market cap that they were willing to
pay five hundred. So it's very hard

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to market refuse. But after that, I had a small operational family office,

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and running for office is something I
hadn't done. I had been involved

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a little bit in the US term
limits move that was to limit the terms

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of Congress to six years in the
House and three terms and two terms of

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the sent and we had been successful
in having valid initiatives in a number of

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states, and in nineteen I think
it was ninety two or ninety three,

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the Supreme Court and not one of
their many five to four decisions, decided

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that the states didn't have the right
to control the limit on the terms of

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their officers. I felt that Congress
would be a much better place if people

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went for six or twelve years.
And I still believe I was still very

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much commuting terminies. But so I've
been a little bit involved in politics.

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And then all of a sudden somebody
calls me. My congressional seat was open

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at that time, and I considered
running for Congress. And the reason I

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considered running for Congress is that a
gentleman by the name of Rob Emmanuel calls

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me and he's such a complete jerk
on the phone, but I said,

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he's gonna. I hear he is
in real life too. He's gonna he's

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gonna be by congressman. And I
said, oh my gosh, that's that's

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so I thought. I considered running
for that seat. And in the meantime,

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it looked like I had already given
money to a female that was running

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going to run for that seat too, Nancy Kaysak. Then I actually did

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hire a consultant and we pulled it
and it sounded like Rom and I would

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compete with each other, and then
Nancy Kaysak would come right through the middle

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side and then decide, I'm not
gonna run. I'm not gonna run.

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I go. I go and visit
Richard Daley, the mayor of Chicago,

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and we talked about and he said, well, I don't want to run

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through Congress, and then so I
but he says, he says, we

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need somebody in the Senate, and
of course there Peter Fitzgerald was the seated

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senator a Republican and very right with
conservative against the women's right to choose the

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right of things. And so I
was I tended to be a very moderate

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Democrat. But that's that's when I
chose to decide to run for the Senate.

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So now you get into this race, and how many are there in

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the primary? Seven candidates? Seven
candidates in the primary. There are four

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of us that are considered to have
a chance to win. And it's a

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long This is a long battle because
it's over. You have to visit all

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the counties in the state. It's
difficult, and this was this was a

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reach for me. Didn't plan my
life to run for the Senate, but

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it's certainly an interesting experience. I
had must have had twelve joint appearances with

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the candidates, including Barack Obama,
Gary Chiho, and ultimately won that race.

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Yeah. Well, actually actually I
ended up leading. I was with

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three weeks ago. I had a
reasonable lead, and unfortunately I had a

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divorce that a divorce settlement that became
public and that overwhelmed the race. And

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if you look at the if you
look at the polls that occurred three weeks

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before that race, you'll see that
it was my race to lose. Wow.

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And and at some point the Chicago
papers sort of headlined the fact that

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you were a former professional coward counter
they that that certainly became a factor,

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but it actually ended up to be
a positive factor rather than a negative.

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That's that's what I was wondering,
because I think to a lot of people

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that would be a positive. They
would say, oh, the guy must

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be smart, right, I mean, that didn't hurt. That didn't hurt.

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Okay, So you lost to Barack
Obama. If you're going to have

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to lose, I guess, not
a bad one to lose too, I

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guess. But now I want to
go a little bit forward again. And

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you had retired and my friends tease
me that, you know, I've said

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that I'm retired from professional gambling,
and my friends say, yeah, you're

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retired until you get the right phone
call. And it sounds like you were

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retired and got the right phone call
in that you read an academic paper.

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Should we go? Is that how
it started to pull you out? I

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had options with my extratise before,
and then in just a few years ago,

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the public became excited about Game Stop
and also about AMC. They I

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think it had to do something with
the pandemic that they didn't know what else

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to do, and so they thought
they could run these stocks, forced the

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shorts to buy in, and they
could make a lot of money. And

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so they were buying these out of
the money calls in game stock in AFC,

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and I thought it was at a
unreasonable levels, and I thought there

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was an opportunity. So I sold
a bunch of calls in both of those

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stocks, and of course the stocks
didn't go up, and it was a

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little painful for a while, but
it ended up to be extremely profit But

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about that time, I'd read an
article in the Journal of Finance, which

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is the premier academic journal regarding equities
and options, and it said the title

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was stock options as lotteries. It
ends up that even in twenty fifteen,

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when this article was published, that
it became apparent that people use the options

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markets as lottery tickets, and they
buy a lottery tickets on certain stocks,

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Tesla being my favorite. Some people
love apples and they think it's going to

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go to the boom, and so
it ends up the more the option,

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which like a lottery ticket, the
more overvalued it is. That was the

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main Poe this is only one factor
that affects the price of options. There.

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It ends up that high capitalization stocks, people do buy rights on those,

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so they tend to sell slightly out
of the money calls, and that

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drives the premium of all the options
down. So there are options that are

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consistently undervalued and the options that are
consistent overvalued. And there's a whole body

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of academic literature that addresses this issue. So it sounds similar. In horse

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racing, there's a long shot bias
that the public likes to bet on the

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long shots, which make them overvalued
even more. And it sounds very similar.

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I think it really is. If
you as I recall the numbers,

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and of course you know the experts
and Bill Bentter and Jenca, I think

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you know the guys that really know
this. But I think that the loss,

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the average loss on a long shot
is about fifty the average loss on

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a favorites about six percent, and
it always it adds up to the average

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take of about nineteen percent, So
it is similar. So yeah, yeah,

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so, but if you're basically selling
lottery tickets, which is where the

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edges as being the seller of these
super long shine bets, when someone hits

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them, your payouts are enormous.
So you have this enormous amount of risk

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involved. Right, that's correct.
In as you state, in all of

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your gambling on an edge, you
have to have the right size bet.

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You can't. You've got a bet
optimally, you've got a bet in proportion

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to your advantage, in proportion to
your bankroll, and you got to figure

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out what those percentages are. I
remember in the that I was on with

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Ken Euston that Ken and I were
the ones that calculated the lost ratios and

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what our bet size was. That
was a big part of the of the

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strategy. Yeah, this sounds a
lot more complicated though, when you don't

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really know exactly what your edge is. You know, in blackjack, you

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know we're here, you don't,
Right, There are other factors that come

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into this. The academic literature just
has there many factors that effect the pressing

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option. And yes, and you
have certain insider actions that may have people

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may have an advantage other so you
have to take all that into the account.

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Yeah, so how long do you
see yourself continuing here? Well,

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this start came out of retirement because
the edges were so big. This started

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as this started as a small project, and I thought I could do it

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with five people. It require a
lot of All of these factors have to

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be put into a model that's very
predictive. And we know that we've heard

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this thing about artificial intelligence AI.
Well, machine learning is a subject that

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has is a subset of artificial intelligence. Has been around an awful long time.

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Actually, these techniques started in the
nineties, and we are using those

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kind of techniques now. I did
start this a little bit earlier. I

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started using some of these machine learning
techniques in a model in a publicly traded

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ETF whole tactical assimilar HTUS in twenty
fifteen, and we had some simple models,

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some simple regression models that actually didn't
perform very well for a few years.

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Unfortunately, where you're dealing with the
market as a whole, you only

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have a few vets, you only
have one bet a year at any one

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time, so it's hard to get
into the long run. As in blackjack,

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you get one hundred hands an hour, and you get eight hundred hands

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a day, you get eight thousand. You spend two weeks, you get

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you get eight thousand observations in the
market you don't get it's quite as many.

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The ETFHTUS takes advantage of some of
these wagers, things that people do

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that affect stock in terms such as
the month end effect. People tend to

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have more money at the end of
the month, they tend to markets.

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As a result, they tend to
buy stocks near the end of the month.

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There has been for a long time
the last day of the month in

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the first three days of the next
month have been positive for the market.

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Similarly, the f o MC meetings
have also been positive because people get scared

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before the meeting. They actually reduced
their portfolio position and then they buy it

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back afterwards. There is a little
bit of an effect, relatively effence.

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So we try to take into account
all these factors included sentiment. Huh.

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And so that's ht US is the
name of the ETF. This is not

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something you would want to hold in
a taxable account, is that right?

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Excellent, good point. It's got
to be in your IRA. It would

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be good for a pension fund,
it would be good for a foundation that

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doesn't have a TAXI. If you
have to pay taxes on this, it

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becomes a disadvantage. So you're exactly
right. I'm glad you brought that up.

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Well, I have owned some full
disclosure, I have actually owned some

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of your ETF. So we're hoping
that this option, these options strategies will

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be will we will be able to
put those into the ETF. I think

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we're actually gazed away from and that
is there's certain things that happen in the

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market. Option markets. People tend
to sell calls against their portfolios, so

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especially in indexes, they sometimes they'll
sell an SMP five hundred call against their

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portfolio stocks, and so they tend
to be cheap. On the other hand,

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puts tend to be expensive because people
need to ensure their portfolio. Certain

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pension funds have obligations to ensure their
portfolio, so they have to buy.

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So there are some irregularities and option
markets hoping that that will enhance the returns

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in HT. Well, very good. I want to thank you for doing

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this. This is really interesting for
me and I think it will be for

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our audience as well, So thank
you very much. Good to be with

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you. Well, there you go. Episode number four is in the can.

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Just a reminder, you can reach
me at Life is a Gamblepod at

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gmail dot com or find me on
Twitter at r wm twenty one and see

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you next time.