The man who shorted the world
While the financial chaos that swept Wall Street this past week certainly can’t be blamed on one man, I think I found the guy who played the leading role. I caught up with him this past Saturday for breakfast at New York city’s posh Regency hotel. We agreed that I wouldn’t describe anything about his looks, age or accent. Though, we had never met, I was drawn to him immediately.
His handshake was firm, his smile warm and I liked him immediately. He passed a small electrical device between us. “Just to make sure you’re not wired,” he said. “ So what would you like to know?”
“Is it true what I’ve heard about you from our friend, that you shorted the world.”
“You greatly overestimate me. Let’s just say, I’m a student of world affairs and I’m not afraid to make take some risks.”
“I heard you made it huge shorting sub prime mortgages,” I said knowingly.
“As Frank Sinatra said, it was a very good year.”
”So, then you sat back and waited for Greece to fall?”
“Hardly. The one thing you need to know me about me is I put myself through MIT and got my Ph.D. — it’s not important where — by playing poker. I need, and love, the action. So when I saw the stock market bottom out in March 2009, I put half my profits into calls — those are options to buy — of Apple, IBM, Dow, etc. To be honest, I made a another killing before cashing out a month ago. I saw the correction coming after I came back from my third trip to Europe in the last six months.”
“You mean Greece?
“Greece was just tip of the iceberg. Spain, Portugal, Italy, take your pick. The Euro was falling apart. All you had to was read the Financial Times or The Wall Street Journal and hire a couple academics. Then, just figure out which companies and bonds to sell short. Then, just wait it out.”
“Just like the sub prime mess?”
“So how did you play Wall Street last week?”
“It all started when Greece began to blow. First the riots, then the Euro began its slide and that scared the crap out of Wall Street. And that fired up the VIX.”
“OK, in a nutshell, the VIX is a measure of the market that the Wall Street pros call the ‘fear index.’ Basically, you can buy an option, really a bet, on an index that rises in value when the volatility increases in America’s equity markets. Actually its been increasing for the last month or so. And that’s exactly what happened in that 30 minutes on Thursday when the market when went bananas.”
“The guys who made the big money were the option players.”
“And you bought a boat load of VIX contracts,” I exclaimed.
Bill Regardie is the founder of Regardies magazine.