AIG Warrants, Hiding in Plain Site
“The warrant is cheaper, I can buy it here, would you like me to do it for you?”
Those were the words I heard our head trader say to one of his traders as I sat on the trading desk of a large investment firm on Wall Street.
The head trader could see every other trader’s book. He could see their P/L, positions, and any orders that came in.
This was during the dotcom boom, and it wasn’t unusual for the head trader, or even another trader, to help someone out who was busy. We were busy a LOT.
In this case, the trader had a large buy order for a stock. And the stock had warrants that traded on it.
If you’re not familiar with warrants, for the sake of this story think of them as call options, the right to buy the stock at a certain price for a certain amount of time.
What the head trader was telling the other trader in that sentence was this.
I see you have an order to buy the stock. The stock is trading at $50. The warrant is trading at the equivalent of $49. Would you like me to buy the warrant for $49 and make you a dollar on every share with the push of a button and absolutely no risk. You can then short the stock to your customer.
Head Trader Offering to Give Another Trader CASH
Or, in layman’s terms, it’s kinda like me walking up to you on the street and offering you $10,000, no strings attached, you literally do not have to do anything.
The answer from the trader, “No, I’m good.”
I was, let me find the word, astonished works well.
No Idea on the Psychology, But I Found Something Unexpected
Two things.
One, this wasn’t some psychological quid pro quo Hare Krishna I give you a plastic poppy you give me $10 kind of thing.
There was no reciprocity needed here. The trader already worked for the head trader. No psychological work games going on.
So, I learned some people, even blood thirsty Wall Street traders, for some reason refuse to see (or receive) what’s right in front of them.
This guy wasn’t sitting on the desk for his health. He was there for one reason. To make money. But, he refused an offer of money.
I’m sure there is some deep psychological Tony Robbins could explain reason for this. But, if you refuse to take what’s freely given, you’re beyond my ability to help.
If anyone reading this would like to ship over $10,000 for me doing nothing I will somehow find it in my heart to humbly take it. Checks accepted.
Two, this one incident opened my eyes to something I hadn’t come to Wall Street to find, but there it was. MAKING MONEY TRADING COULD BE EASY.
I thought trading meant you always had to be freaked out, palms sweating, stomach churning, blood pressure rising, and health deteriorating.
That was me when I first started trading. So, that’s what I expected. The first stock I ever bought went to $0. Talk about stress and strain.
I went to Wall Street expecting to continue to be a basket stress case, but to at least make money while hurtling toward that early grave. I figured I would at least leave a legacy to my family when I departed for the great beyond.
But, here it was. Money lying on the floor to be picked up.
No sweaty palms. No antacids. Not even a blood pressure pill in sight.
Easy, Not Lazy, and The Choice is Yours
Now, you knew this was coming right? The qualification of “Making money trading could be easy”.
First, EASY does not equate to LAZY. There is work involved to get to EASY.
And, Second, and more importantly, you have to choose easy.
Let me do some Lucy style ‘splaining.
It took a lot of work, pain and (first world) hardship for me to get to the easy trades.
I uprooted my wife from being near her family and moved her to New York city. In simple terms, she DID NOT want to go.
We went from a massive apartment in DC overlooking Rock Creek Park, to a TINY two room apartment in Brooklyn far from friends and family.
We were also going through some health related issues that would have been nice to have family nearby to help with, but we sucked it up and made the move.
It also took a ton of work to get to the easy trades. That meant working all day on the trading desk and then going to classes at night…and, leaving my wife at home alone.
Yep, trading classes. Chart reading. Business fundamentals. Candlestick charting. Financial analysis. Technical analysis.
Lots and lots of time. Studying. Learning from other traders. Studying. And then studying and applying what I learned from classes and other traders to my trades on the trading desk.
But, all of this work and time spent studying trading had a secondary payoff, which I never expected.
I learned that I could choose how to trade, and that some types of trading were hard, at least for me. And, some types of trading were easy.
And I could choose which I wanted to do.
You Take the Road Not Taken…I’ll Be on the Interstate
Let me give you an example of each.
To me, value investing is hard. There are a LOT of “undervalued” stocks in the market, when you use some standard fundamental analysis tools. PE ratios, book value, price to sales, etc. etc. etc.
The problem I have with value investing (I know I may lose some people here, and that’s cool, you probably shouldn’t be reading my stuff anyhow if you’re a value guy or gal) is this.
There is no catalyst for movement of the stock. Maybe the market figures out your particular value stock is undervalued…maybe not.
Why would I want to park my money in an investment that is undervalued which may or may not move higher when it is finally fairly valued?
To me that’s hard stuff. So, I don’t do it.
Now, an easy one. Range trading.
…Or, How I Made Over 100% in a Stock That Went NOWHERE This Summer/Fall
Here’s why I like range trading. And I’ll show you a perfect example.
If you don’t know what range trading is here’s a two sentence tutorial. Find a stock that trades down to a certain price, and then trades up to a higher price, and then trades down again, etc. Buy at or near the bottom of the range, sell at or near the top of the range.
You have clear buy and sell points. Easy.
If the stock exits the range to the downside you have a clear stop loss point. Easy. And, if it exits the range to the upside, you don’t own the stock then anyhow so no decision to make.
The trade can make money in any kind of market, and you get to laugh at the buy and holders who say things like “this stock has gone nowhere all year.”
To do the trade you have to be able to read a stock chart and identify levels of support and resistance. Easy for me after all of that technical analysis studying.
Quick aside. If you don't take anything else from this article please, please, please learn how to identify support and resistance. That skill alone will both make and save you TONS of money in the market.
Now for a specific example. It’s one I’ve been trading for all of the second half of 2019, and have shared with my paid subscribers.
Take a look at a daily chart of AIG. From May of this year the stock has traded from around the lower end of the range, about $51-near $52 to $55-$57 six times.
Now, don’t run away, but we’re going to do a little math here.
Let’s say you kinda stink as a trader, so you only captured about $2 of profits on each move up and down.
So you made $12 on your $52 investment (we’ll assume you bought at the high end of the bottom range). So you gained around 23% in 8 months, half of which you were in cash.
Not bad at all. But, not what I personally would consider all that great either.
So, let’s add a subtle twist to our trade. Instead of trading the $52 AIG stock, we trade the $11 AIG warrant (AIGW, or AIGWS, depending on your broker or chart software).
If you look at a chart of the warrant, you’ll see it looks exactly like the stock chart.
We’ll assume that we bought in the $11-$12 range, and again we’ll assume we only made $2 on each trade. (I think this is a VERY CONSERVATIVE estimate, but that’s what we’re going with.)
So, again you would make $12 on your trading during the past 8 months. But, assuming you bought at $12 each time, again, the top of the bottom range, you just made a 100% return. And, again, you were in cash half the time.
100%, now, that’s more like it.
At this point an astute trader would say, hold it now. I wouldn’t have known it was in a range until at least the third trade. So, I would have missed the first two trades and only have made $8, or 4 times $2.
That means I would only have made 67%, a big difference.
So, how could I have made the 100%? Answer, some relatively easy chart reading.
Scroll back in time on your AIG chart to last year. Specifically May through October. What do you see?
The exact same pattern that has repeated itself this year. I’ve written ad nauseam about it, but…patterns, patterns, patterns. That’s the key to the easy trade.
Make sense? Do you see why it’s an easy trade if you’re looking for it? If this is the type of trade you choose to do?
By the way, what if you were uber conservative, and really wanted to see the pattern develop, and only caught 2 of those 6 trades? Dude, that’s a 33% return, and you were in cash 67% of the time!
Just sayin’.
If you want some more easy trades, join our private group of easy trade seekers here: