A Framework for “Doing Something” with Stock Warrants in this Market
When I first started trading, and I mean the very first day I started trading on a market maker desk, I had the unpleasure (that should be a word if it’s not) of meeting one of the rudest, most unpleasant people I’ve ever known.
Now, in the business world, I’ve known conniving, scheming, out for themselves people, but most of them are pleasant to your face.
One of my former partners actually worked actively to get another consultant, who had brought us into a business venture, fired for no reason at all. But he was really nice to the guy’s face.
My partner, which I didn’t know when we formed the partnership, was a bit of a #$%#%.
But I digress.
This trader wasn’t manipulative or conniving, just mean, yelled (and I do mean yelled, it was a trading desk, and a lot of behavior that is unacceptable in other places of business, were pretty commonplace on the trading desk) a lot at others when he couldn’t do his job, etc.
It turned out, that my very first day on the job, I was put at this guy’s trading terminal to practice entering trades. He hadn’t gotten in to work yet.
Training Mode
You could place the terminal in “training” mode, and nothing done on it would actually go out to the market.
Well, it was my first day at a new job, in a new city, etc. etc. etc. I was obviously nervous. And, I totally forgot to turn the computer off of training mode. My bad.
It was kinda like if the meanest, nastiest person you knew was a car mechanic, and you replaced all of his shiny Craftsman wrenches with bendy rubber ones. In about two seconds, you’d get a really funny scene of him having a fit and slinging rubber wrenches all over the garage.
It was a very similar scene when this trader sat down and tried to trade the market open. And nothing happened when he tried to execute orders. And nothing continued to happen.
It was like a volcano had erupted in the back of the trading room.
I was seated safely by the assistant head trader at that point. But, a few minutes into the trading day, I realized what was happening. Oops.
After some choice yelling at me, we, ahem, worked it out.
I’ve been taught every situation should be a learning experience. If you mess up, or the situation you’re in is messed up at no fault of your own, or circumstances just go against you, learn from it.
I’m sure we’ll learn a ton from the current situation we’re ALL in.
Learning From Mean Guy
I’ll have to admit, I didn’t think I’d learn anything from mean, nasty guy, except maybe what NOT to do. But, much to my surprise, I would get an invaluable lesson from yelling, mean, nasty guy.
One of the phrases he loved to yell, almost every other day, was “DO SOMETHING!!!!!”.
Now, he was yelling this at his assistant because he was incapable of doing for himself, or staying calm and telling his assistant what needed to be done, in a very busy trading market. Like I said, mean, nasty…
But, it turns out that DO SOMETHING when paired with the right strategy, is pretty good advice. And, maybe we need to yell it at ourselves sometimes to get out of an unfortunate situation…like a market crash.
The strategy I’ve paired my internal DO SOMETHING with the most over the years is a strategy my mentor taught me when I was learning to trade. It’s the strategy of making prints.
It goes something like this.
Let’s say I buy 1,000 shares of a stock at $15. It trades up to $17. Woo hoo. And then it trades back to $15. Dang. I want to buy more because I think it’s going to go back to $17, or even $18 or $19, but my trading plan, or my capital, or whatever limitation I have on the size I’m trading, says I can only own 1,000 shares at $15.
When this scenario played out, and I went to my mentor, and boss at the time, he would say one thing…”Did you make any prints?”
Or, did you sell any stock as it went from $15 to $17. And I would think to myself, no, because I think it’s going to $18, or $19, or who knows, maybe even $20.
But I would say “No” and he would say, “Well, you can’t buy anymore at $15 then.”
I had failed to DO SOMETHING.
So, I learned, not after him telling me once, but eventually I got it. If I want to trade for a living I actually have to make prints. I don’t get paid to buy a stock and sit there while it moves up, and down, and up and down, and up…and down.
Unfortunately, for many people, that’s the market we’re in right now. And most are not getting paid in an up and (more often lately) down market. No one’s making prints.
As I walk my dog around my neighborhood these days, the conversations with my neighbors, which take place at a distance of at least 6 feet, often end in them saying “I’m not even looking at my brokers statements anymore.”
I want to get Austin (that’s the mean, nasty trader guy, just remembered his name) on the phone, so he can yell at them, “DO SOMETHING!!!!” (I’d actually be shocked if he hadn’t passed away at this point, so it would probably be via a Ouija board, vs. a phone, but same idea.)
Yesterday in the latest Warrant Observer monthly newsletter I shared a framework I’m using right now to help guide where I make prints (both selling and buying) in the current market. Here’s an excerpt from that newsletter with the framework, which I explain using the simplest business I can, a lemonade stand.
I hope you’re DOING SOMETHING and making prints in this market.
A Framework for the Current Market
Given the current environment, plus at least the possibility of an ongoing bear market, what am I looking for in a warrant? Either to invest in or to trade.
I’ve written in a few emails about “looking through” the current environment to the new normal we’re headed for. Let’s bring that into clearer focus, and use a framework to define exactly what we should be looking for.
Let’s go back to our lemonade stand to lay out the framework, and then look at a few warrants/stocks and where they fit.
What do I want in my lemonade stand investment?
First, I want a lemonade stand that has cash in the bank. As I’ve said ad nauseam, I’m a conservative trader, and investor. If my lemonade stand manager has to worry about where they’ll get money to make the next payroll, they’re not focused on growing the business and “what’s next”.
A risk of bankruptcy isn’t something I ever want to hear, even whispered, about a warrant/stock I’m long. (This may not be the case where I’m doing a percentage hedge trade.)
Second, I want a lemonade stand that serves lemonade people simply MUST have in the new normal. Maybe that lemonade is spiked?!?! I want people coming back to the stand FASTER than they go back to the hot dog stand my neighbor is running. (He serves bad hot dogs anyhow.)
I’m looking for industries or activities that consumers will crave when we get to the new normal.
Third, I want a lemonade stand that is going to be EVEN MORE in demand in the new normal than it was before this whole world upending mess began.
Think of the explosive detection devices I mentioned in one of my emails that were needed post 9/11. It wasn’t that we didn’t already have them at airports prior to 9/11, but they were mandated by law after. Maybe my lemonade stand is going to get a boost from the stimulus package, or one to come.
Finally, as I run through this framework I also want to be aware of a timing issue that will permeate my trading. Some warrants I may not want to own now, but I know their time is coming. A perfect example would be infrastructure companies. I don’t want to own them now, but if an infrastructure bill out of the U.S. government looks more and more likely, I’ll want to own them at some point.
Also, speaking of timing, there will still be certain event driven trades that I want to do even in the current environment. One of these is the DEACW trade. As I said in a prior email, I do want to be long that warrant going into the April 9 shareholder meeting to approve the merger.
Now let’s run a few warrants through the framework…
If you need more help in navigating the warrant market during these turbulent times, we’re always hanging out here: