Go Where the Money Is

Why do you rob banks?

“Because that’s where the money is.” ~ Willy Sutton

The S&P 500 Index Options — SPX — is where the biggest money managers in the world hedge their risks.

Whether you’re a hedge fund manager, a pension administrator, a large speculator, or managing an immense family office with stock market exposure — in many ways you’re paid more to not lose money, rather than swinging for the fences and chasing alpha.

And one of the best ways to insure against losses is to hedge your risk via index options.

Of course, insurance costs money. Sometimes more than it should. But the managers that are tasked with not losing money don’t care. The price of insurance — and therefore job security and piece of mind — is immaterial. They can and they must hedge. That’s what they are paid to do.

On the other side of these transactions are the speculators who provide the capital and liquidity for the risk averse to accomplish these tasks. They accomplish this by making markets for the fund managers who wish to purchase options for a premium. The fund managers are the buyers of premium, speculators are the sellers of premium.

While the large fund managers are paid to not lose money, the speculators on the other side of the trade are paid for shouldering the risk. Their job is to collect the premiums and manage their risks such that they don’t get hurt too bad when markets get dicey. Selling premium is a “high win-rate” game in which most of the time the odds are in your favor that you’ll make money. But you run the risk of the occasional bad beat. The secret sauce is in positioning yourself so that no one bad beat takes you out of the game.

I engage in this game.

I employ premium-selling tactics in SPX options that are part systematic, part discretionary. Like Willy Sutton, I want to make money. And I want to operate in the pool of the largest capital flows, swimming like a minnow grabbing a little premium here and a little premium there, while avoiding the sharks that will eat me alive.

There’s a big wide ocean of money out there. Go where the money is. Win.