Hey, everybody, this is Life is a Gamble episode number four Blair Hull.
Before I get to that, just a couple of announcements. I want
to remind people that if you are hearing this on the old gambling with an
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out. Okay, now here's the show. Okay, so i'd like to
well, first of all, let me start here. Welcome Blair Hall to
Life as a Gamble. Thank you, it's good to be here. So
I want to start in nineteen eighty seven and the markets are crashing, and
you are on the Chicago Board of Options Exchange at that time, or were
you in the Pacific. We had a market maker operation that was operating in
Chicago and the Chicago Board of Options Exchange, but we also had traders in
New York at the American Stock Exchange also, and we had a presence on
the New York Stock Exchange. So we were guilty dealing with multiple markets here,
I see, and so could you just paint a picture for an audience
of what this crash was like and what happened. Well, nobody expected this.
The markets had been retreating for some time a few weeks before. Nobody
expected this time in correct, and what happened was everybody was completely in panic.
Moote. We were on the Chicago Board of Options Exchange where we were
actually the primary market maker in the SPX options on that day. The X
in those days they has changed. The primary market maker would be one firm
on one day at another firm on the other day. There were actually four
firms were primary market makers, and so it was our responsibility to put up
quotes for the S and P five hundred options. And I was in that
pit that morning. The FED had actually increased the requirements for market makers and
customers. They increased the margin requirements at that time, which was a big
mistake because that means that even the market makers and the professionals were paneled.
We had a position in the major market index at the Board of Trade,
which he was at twenty stocks in it. It was really a mirror of
the Dow Jones average, and it was the futures market. At the Board
of Trade. We had a big position. I was the only member of
the firm that had a full Board of Trade seat. So I actually went
that morning over to the Board of Trade after I think it was a half
an hour into the market and we realized that we needed to buy backs of
the futures contracts, and so I went over to the Chicago to the Board
of Trade to trade to trade that contract. So everybody was in panic mode,
and basically everybody wanted to sell and nobody wanted to buy. But you
were required to make a market, right, Yes, you're required to make
a two sided market in the options market and the futures market too, and
so and we had operations in New York and Chicago, both in the futures
and options and stocks, so we were trying to trade these all against each
other. But at the same time we had extreme capital requirements too, so
it was a very it was a very tense. Yeah, so it sounded
like a very risky time. And I guess from your background in blackjack,
it was all about mitigating risk. Well, it was. It was trying
to get an advantage and then stay in the game to make sure your bets
are properly you have the proper size size wager. At any one time,
I went over to the order trade and there were just completely all sellers.
That was the only and we actually had a short position in the major market
index. So I was buying in five lots. And suddenly at about while
somewhere around nine thirty in the morning, there were rumors that the New York
stock is James with halt and the Chicago merket deal Hall Chicago Merkentiel was the
more important market because it was the futures market. And if the Chicago Mercantiel
halted with our markets had closed, it was a complete catastrophe. I then
asked my firm to go investigate what is happening. Happened on trading halts,
and of course this is sort of ridiculous, because how do we we were
a small firm, we have nineteen people. How do I get somebody to
go to the library? You had to go to the library in those days,
it was before Google, and so that was sort of ridiculous. At
about ten thirty, I said, I told I told the firm to be
long on the hall because we anticipated there would be a halt of the markets.
And just before that, Drexel Burnham comes in with a very large cell
order, and because I'm the only buyer in the pit, he whispers to
me, where will you make a market for a hundred contracts? We had
been trading in five lots, so I gave him a ridiculously low bid and
he said, you own them. I completely panicked, or is this is
much larger trade than I should have taken? And then and then the market
trade slightly higher, and he says, I'll sell you another fifty I bought
him. I had intended to share some of those contracts that were at a
very good price with my fellow traders. I didn't do that though, actually,
and the market went straight up from that point really, So that was
the eighty seven crash. And I was just in the right place at the
right time, with the right well and you kept your head when other people
did not. Well. It was quite fascinating because even the usually when you
have tremendous buy and then volatility, the pits are crowded. In this case,
even the traders, the local traders panicked. They went there, they
went to their banks and got cash, and they took cash and went on
vacation because they were scared to death. So it's the only time I've ever
seen in the markets. It's usually when there's a lot of activity, there's
a lot of greed in the market. This case was hear wow. And
did you find that that served you well moving forward that when there was a
lot of fear in the market, that was a good thing for you.
Well, this was such a unique situation, but there's no question that when
there when there is fear and there's a lot of volatility and a lot of
a lot of movement, there's more money to be So I want to talk
about another really large gamble you made, and that was deciding to run for
public office. So this is now some years later. You had sold your
company right at that the crash was in eighty seven, and I sold a
Goldman Sachs came in and made an offer for our firm that was very hard
to refuse. We were about to go public as a publicly traded company in
nineteen ninety nine, and we actually were about to go on a road show,
and so we were to have a public offer, which could be an
IPO, and Goldman looked at the numbers and then said no, I don't
think you should do that. We should pay you a premium. It would
have gone public. I think at about a three hundred and fifty million dollars
market cap that they were willing to pay five hundred. So it's very hard
to market refuse. But after that, I had a small operational family office,
and running for office is something I hadn't done. I had been involved
a little bit in the US term limits move that was to limit the terms
of Congress to six years in the House and three terms and two terms of
the sent and we had been successful in having valid initiatives in a number of
states, and in nineteen I think it was ninety two or ninety three,
the Supreme Court and not one of their many five to four decisions, decided
that the states didn't have the right to control the limit on the terms of
their officers. I felt that Congress would be a much better place if people
went for six or twelve years. And I still believe I was still very
much commuting terminies. But so I've been a little bit involved in politics.
And then all of a sudden somebody calls me. My congressional seat was open
at that time, and I considered running for Congress. And the reason I
considered running for Congress is that a gentleman by the name of Rob Emmanuel calls
me and he's such a complete jerk on the phone, but I said,
he's gonna. I hear he is in real life too. He's gonna he's
gonna be by congressman. And I said, oh my gosh, that's that's
so I thought. I considered running for that seat. And in the meantime,
it looked like I had already given money to a female that was running
going to run for that seat too, Nancy Kaysak. Then I actually did
hire a consultant and we pulled it and it sounded like Rom and I would
compete with each other, and then Nancy Kaysak would come right through the middle
side and then decide, I'm not gonna run. I'm not gonna run.
I go. I go and visit Richard Daley, the mayor of Chicago,
and we talked about and he said, well, I don't want to run
through Congress, and then so I but he says, he says, we
need somebody in the Senate, and of course there Peter Fitzgerald was the seated
senator a Republican and very right with conservative against the women's right to choose the
right of things. And so I was I tended to be a very moderate
Democrat. But that's that's when I chose to decide to run for the Senate.
So now you get into this race, and how many are there in
the primary? Seven candidates? Seven candidates in the primary. There are four
of us that are considered to have a chance to win. And it's a
long This is a long battle because it's over. You have to visit all
the counties in the state. It's difficult, and this was this was a
reach for me. Didn't plan my life to run for the Senate, but
it's certainly an interesting experience. I had must have had twelve joint appearances with
the candidates, including Barack Obama, Gary Chiho, and ultimately won that race.
Yeah. Well, actually actually I ended up leading. I was with
three weeks ago. I had a reasonable lead, and unfortunately I had a
divorce that a divorce settlement that became public and that overwhelmed the race. And
if you look at the if you look at the polls that occurred three weeks
before that race, you'll see that it was my race to lose. Wow.
And and at some point the Chicago papers sort of headlined the fact that
you were a former professional coward counter they that that certainly became a factor,
but it actually ended up to be a positive factor rather than a negative.
That's that's what I was wondering, because I think to a lot of people
that would be a positive. They would say, oh, the guy must
be smart, right, I mean, that didn't hurt. That didn't hurt.
Okay, So you lost to Barack Obama. If you're going to have
to lose, I guess, not a bad one to lose too, I
guess. But now I want to go a little bit forward again. And
you had retired and my friends tease me that, you know, I've said
that I'm retired from professional gambling, and my friends say, yeah, you're
retired until you get the right phone call. And it sounds like you were
retired and got the right phone call in that you read an academic paper.
Should we go? Is that how it started to pull you out? I
had options with my extratise before, and then in just a few years ago,
the public became excited about Game Stop and also about AMC. They I
think it had to do something with the pandemic that they didn't know what else
to do, and so they thought they could run these stocks, forced the
shorts to buy in, and they could make a lot of money. And
so they were buying these out of the money calls in game stock in AFC,
and I thought it was at a unreasonable levels, and I thought there
was an opportunity. So I sold a bunch of calls in both of those
stocks, and of course the stocks didn't go up, and it was a
little painful for a while, but it ended up to be extremely profit But
about that time, I'd read an article in the Journal of Finance, which
is the premier academic journal regarding equities and options, and it said the title
was stock options as lotteries. It ends up that even in twenty fifteen,
when this article was published, that it became apparent that people use the options
markets as lottery tickets, and they buy a lottery tickets on certain stocks,
Tesla being my favorite. Some people love apples and they think it's going to
go to the boom, and so it ends up the more the option,
which like a lottery ticket, the more overvalued it is. That was the
main Poe this is only one factor that affects the price of options. There.
It ends up that high capitalization stocks, people do buy rights on those,
so they tend to sell slightly out of the money calls, and that
drives the premium of all the options down. So there are options that are
consistently undervalued and the options that are consistent overvalued. And there's a whole body
of academic literature that addresses this issue. So it sounds similar. In horse
racing, there's a long shot bias that the public likes to bet on the
long shots, which make them overvalued even more. And it sounds very similar.
I think it really is. If you as I recall the numbers,
and of course you know the experts and Bill Bentter and Jenca, I think
you know the guys that really know this. But I think that the loss,
the average loss on a long shot is about fifty the average loss on
a favorites about six percent, and it always it adds up to the average
take of about nineteen percent, So it is similar. So yeah, yeah,
so, but if you're basically selling lottery tickets, which is where the
edges as being the seller of these super long shine bets, when someone hits
them, your payouts are enormous. So you have this enormous amount of risk
involved. Right, that's correct. In as you state, in all of
your gambling on an edge, you have to have the right size bet.
You can't. You've got a bet optimally, you've got a bet in proportion
to your advantage, in proportion to your bankroll, and you got to figure
out what those percentages are. I remember in the that I was on with
Ken Euston that Ken and I were the ones that calculated the lost ratios and
what our bet size was. That was a big part of the of the
strategy. Yeah, this sounds a lot more complicated though, when you don't
really know exactly what your edge is. You know, in blackjack, you
know we're here, you don't, Right, There are other factors that come
into this. The academic literature just has there many factors that effect the pressing
option. And yes, and you have certain insider actions that may have people
may have an advantage other so you have to take all that into the account.
Yeah, so how long do you see yourself continuing here? Well,
this start came out of retirement because the edges were so big. This started
as this started as a small project, and I thought I could do it
with five people. It require a lot of All of these factors have to
be put into a model that's very predictive. And we know that we've heard
this thing about artificial intelligence AI. Well, machine learning is a subject that
has is a subset of artificial intelligence. Has been around an awful long time.
Actually, these techniques started in the nineties, and we are using those
kind of techniques now. I did start this a little bit earlier. I
started using some of these machine learning techniques in a model in a publicly traded
ETF whole tactical assimilar HTUS in twenty fifteen, and we had some simple models,
some simple regression models that actually didn't perform very well for a few years.
Unfortunately, where you're dealing with the market as a whole, you only
have a few vets, you only have one bet a year at any one
time, so it's hard to get into the long run. As in blackjack,
you get one hundred hands an hour, and you get eight hundred hands
a day, you get eight thousand. You spend two weeks, you get
you get eight thousand observations in the market you don't get it's quite as many.
The ETFHTUS takes advantage of some of these wagers, things that people do
that affect stock in terms such as the month end effect. People tend to
have more money at the end of the month, they tend to markets.
As a result, they tend to buy stocks near the end of the month.
There has been for a long time the last day of the month in
the first three days of the next month have been positive for the market.
Similarly, the f o MC meetings have also been positive because people get scared
before the meeting. They actually reduced their portfolio position and then they buy it
back afterwards. There is a little bit of an effect, relatively effence.
So we try to take into account all these factors included sentiment. Huh.
And so that's ht US is the name of the ETF. This is not
something you would want to hold in a taxable account, is that right?
Excellent, good point. It's got to be in your IRA. It would
be good for a pension fund, it would be good for a foundation that
doesn't have a TAXI. If you have to pay taxes on this, it
becomes a disadvantage. So you're exactly right. I'm glad you brought that up.
Well, I have owned some full disclosure, I have actually owned some
of your ETF. So we're hoping that this option, these options strategies will
be will we will be able to put those into the ETF. I think
we're actually gazed away from and that is there's certain things that happen in the
market. Option markets. People tend to sell calls against their portfolios, so
especially in indexes, they sometimes they'll sell an SMP five hundred call against their
portfolio stocks, and so they tend to be cheap. On the other hand,
puts tend to be expensive because people need to ensure their portfolio. Certain
pension funds have obligations to ensure their portfolio, so they have to buy.
So there are some irregularities and option markets hoping that that will enhance the returns
in HT. Well, very good. I want to thank you for doing
this. This is really interesting for me and I think it will be for
our audience as well, So thank you very much. Good to be with
you. Well, there you go. Episode number four is in the can.
Just a reminder, you can reach me at Life is a Gamblepod at
gmail dot com or find me on Twitter at r wm twenty one and see
you next time.