Interesting trading 'strategy'

Discussion in 'Trading' started by Ghost of Cutten, Dec 28, 2010.

  1. Take two separate trading accounts. With account A, consistently sell deep out-the-money ES puts, month after month. With account B, consistently buy 3/4 as many deep out-the-money ES puts.

    You should make steady money most months, and then account A will go into a massive account debit during a market crash, with account B scoring huge gains.

    The person whose name account A is opened under, is actually a penniless hobo of no fixed abode. The brokerage has to eat the loss, the bum declares bankruptcy. Meanwhile, you have just retired off your gains in account B. You meet the tramp a year later once he's changed his name and moved to Pattaya, and hand him his 50% share of the winnings.

    What is the flaw in this strategy?
     
  2. I think one thing you forgot is that if the market stays up, you have to transfer money from account A to account B on occasion - your losses in account B will add up as the puts you buy become worthless.

    So, the brokerage would be able to trace that you either are or know account A, because during months the market remains up and you make money in account A and lose in account B, you then transfer the money from account A to B to continue this the next month and so on.

    Of course, if you have enough money in account B and the market crashes before you run out, you'd be OK in that case.

    Edit - I guess in theory you could try using 2 separate brokerages so they'd be less likely to know anything was going on!

    JJacksET4
     
  3. jmoo

    jmoo

    Two things come to mind... You better trust the hobo not to close out the account... I'm not familiar with margin requirements on the short puts but wouldn't you have post collateral?
     
  4. TD80

    TD80

    Ah Cutten, I say this in an endearing manner, that you sir, like all clever scoundrels, have adapted to our new and ridiculous "American Capitalism" with ease.

    I don't mean to overcomplicate your strategy, but perhaps this would be a gentlemanly approach:

    1. Deposit said funds in HoboCorp Account
    2. Place Call to Goldman's Derivatives Desk, request they create a CDS on said HoboCorp
    3. Have Goldman pay off ratings agencies, market being short this new HoboCorp CDS as a "sure thing" making consistent returns to investors from some unsophisticated idiot stupid enough to pay a premium protecting them from HoboCorp insolvency, and those "stupid" people are you (and hey, let's be honest, Goldman too) taking the other side of the CDS trade.
    4. Wait for blow-up, collect Cash, retire gracefully when the inevitable happens.

    Like all great stories, it has conflict (pun intended), and you will see likenesses to great stories of old.

    You sir, are simply a call away from Goldman's Desk to becoming a very rich man. That is, of course, assuming the risk people at the brokerage aren't wondering where the hell this HoboCorp got six figures and no other net worth or income to be shorting index puts...
     
  5. How does Bobo Hobo, a penniless bum with no fixed abode get Level 4 approval for writing naked? (Level 4 is the highest approval level and usually requires demonstration of experience as well as a sizeable account to satisfy the broker)
     
  6. ^^^

    This is exactly how you "lose money trading" with a pending divorce so your soon to be ex-wife doesn't get all your loot...
     
  7. There is no flaw in the strategy. This is how a lot of corporations operate to inflate balance sheet. Governments also operate like that. Before they sell state assets or make an IPO, they create two companies, one that has all the debt and another that has all the assets. Then they sell or list the "clean" company and they drive bankrupt the one with the debt. In this case they defraud the lenders of the company. In your case although the strategy has no flaw, there are legal issues. You basically owe the money if they find you, and they will, believe me, digital money can be fully traced.
     
  8. Crispy

    Crispy

    Its a crime.
     
  9. Prison.
     
  10. +1

    Best answer so far...:)
     
    #10     Dec 29, 2010