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FANDUEL FOR THE MARKETS

By: Tony Minopoli

I am a long-suffering, but loyal New York Jets fan. As someone who grew up before modern sports betting, I understand betting on a game with a point spread or betting the over/under on total points scored, however, the ability to bet on individual plays and players is still a bit foreign to me. But it is all betting after all and is supposed to be recreational.

Yesterday, zero-day options were one of the factors cited that halted the recent stock market winning streak. Others focused on profit-taking as the culprit, though, in my mind, this is the most tired excuse for describing a market downturn and shows a real lack of original thinking or analysis. But I want to focus on zero-day options today.

I am a long-term investor. I believe that we are most rewarded for developing our strategy around our short-, intermediate-, and long-term goals and structuring our investment portfolios to meet these goals. For example, if one is purchasing a home in less than a year, I believe a bank account or Treasury Bill can be an appropriate investment because of time horizon and safety. Intermediate-term goals in the range of 2 to 5 years can be covered with high-quality bonds of appropriate maturities. Finally, long-term goals can bring stocks, longer-dated bonds, and alternative investments comfortably into the discussion. I also appreciate hedging for currency or commodity exposure or using a long/short equity strategy to hedge long equity exposure.

I do not understand the real rationale for zero-day options because they can serve only to allow for aggressive speculation. Hedging for one day? Big stretch. I suppose coming into the markets prior to October 1987 and hearing of the modern miracle of program trading may have jaded me a bit. I also watched Nobel gilded genius evaporate when Long Term Capital went “poof”. If people want to speculate with a portion of their assets or day trade stocks in an attempt to generate profits, I get that. But when we have leveraged one-day derivatives, we begin to create excess volatility, particularly when a trade gets crowded, and that can begin to push the markets more than a little. If a crowded zero-day options trade triggers algorithmic trading models, we can have even more exacerbated trades. Despite protestations, most of these algorithmic trading models are simply juiced-up trend-following models and many ultimately “follow” the same factors, although from a variety of angles. But if these models get triggered because of a jump in the VIX[1] or the market falling through a resistance level, the market can begin to move irrationally. I am far from a market Luddite, but there is not a Las Vegas casino game that allows for this type of betting.

Excuse me, I have to go find a new meme stock…just kidding!

[1] A real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index.

This commentary has been prepared by Knights of Columbus Asset Advisors (“KoCAA”) for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions and information expressed herein reflect our judgment and are subject to change without notice. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities.

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