Wednesday, September 24, 2008

gambling with Warren Buffet

On Monday I went long on Goldman in a big way, buying the GS Jan 2009 150.0000 calls at 7.25. Other options were the LEAPS on MS and GE, because I thought the financials were undervalued. By Tuesday depression had set in, because the speed of the government bailout had predictably slowed and market was not responding. Even worse, the deleveraging of MS and GS and their evolution into bank holding companies would surely mean lower profits and a lower multiple. Still, they were trading at book value (however one wants to estimate it) -- how could I lose?

Trading options is a lot different than trading stocks. My nontaxable accounts are littered with technology stocks that I have bought on momentum, only to see them tank in 2002. But with common equity you can always buy and hold. Not so with options. While Goldman certainly represents the best of breed in M&A and private equity, holding the options means you don't have time to wait for their eventual recovery.
GPYAJ.X will be worthless come the third Saturday in January.

My father, a longtime broker for Merrill Lynch and UBS, used to trade options and other derivatives because it was like going to Las Vegas from the comfort of your home. This week I felt the familiar knot in my stomach that was all too common in late 2000 when the tech bubble started to unwind. It brought back memories of all my bad trades in the past: Exodus Communications, Vitesse Semiconductor, JDS Uniphase. I'll never forget the day I thought Yahoo was due for a correction and wrote naked calls, only to see YHOO added to the S&P 500 the following week (that trade earned me a 30-day suspension from my broker). Everyone likes to boast about their prowess in the market, because it makes great cocktail conversation. Few people talk about their losses.

I like to think I'm smarter now. Evidently Warren Buffet agrees with my call on Goldman. It's a great day to be an investor!

1 comment:

KeepDurhamDifferent! said...

Needless to say this was a terrible call. I won't have to wait until January for GPYAJ.X to be worthless!