Bubbles, Long Tails & Freedom

Heather Cullen

Heather Cullen

Author
In The Money

Heather Cullen Blog Bubbles Long Tails Freedom

Bubbles, Long Tails and Freedom.

I have been reading the Psychology of Money by Morgan Housel, a best seller about wealth, greed and happiness. It didn’t start well; there were the usual stories, one about a man who pumped gas and swept floors all his life and died with $8 million in the bank. The other, a tech executive who carried stacks of hundred dollar bills and used gold coins as skipping stones who went broke.

It seemed like it was going to be one of those moral tales about the virtues of frugality and saving so I started to lose interest.

Personally, I would hate to sweep floors and pump gas just so that I could die rich! 

Then it took a turn for the better, and I thought I would list some of the things I learned:

Long Tails

The chapter on long tails was fascinating. The subheading is ‘you can be wrong half the time and still make a fortune’. Exactly my thoughts. I have been finalizing my backtesting system and I noticed the success rate of ITM over the last 30 years. Of 30 trades, 16 were winners, 14 losers. Not much better than chance, so how could ITM produce such great results?

Heather Cullen ITM Blog bubbles long tails freedom

Because in a winning trade we made on average 16% and on a losing trade we lost 3%.

That makes all the difference.

Bubbles

Housel has the best theory I’ve heard about how and why there are bubbles. Yes, I know about the madness of crowds, and I agree.

Housel’s explanation is about it being caused by the different time frames of different types of investors, and makes a lot of sense.

Heather Cullen ITM Blog bubbles long tails freedom

The Great Depression

I didn’t know that at the time of the great market crash of 1929 only 2.5% of the population held stocks. So why did the Depression affect so many people for so long? Housel postulates that it is the narrative rather than the actuality that causes the problem. Another good explanation.

Financial Freedom

The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today”. This is the highest dividend money pays. (Housel)

Heather Cullen ITM Blog bubbles long tails freedom

You may remember  that I had a driving ambition never to have to work for anyone else ever again. I haven’t for twenty years now,  something I am grateful for every single day.

So, a bit of a rave about the book. I recommend it, it’s worth reading.

To the markets

Well, what a lovely week! I got my birthday wish. Although Wednesday was pretty unpleasant after the Fed, Thursday and Friday made up for it and we are now at all-time new highs.

SPY Chart

The week closed on a new all-time high of $494.35, and increase of 14% since entering the trade. I can’t help looking at the 500 level with trepidation. It is such a significant number it may prove to be quite strong resistance.

I hope that I am wrong; I was wrong about the 400 level in April 2021, when it just sailed through without a backward glance. Let’s hope that I am just as wrong again!

This helps to keep things in perspective. I saw a headline the other day: ‘stock market euphoria!’. Given that we are only now attaining the levels of 2 years ago that may have been an exaggeration!

SPYG Chart

SPYG is following the same pattern as SPY, and is closing in on $70, but is not making new highs.

Heather Cullen ITM Blog bubbles long tails freedom

And in perspective you can see that it has some way to go before it is making new highs. But it is headed in the right direction

Heather Cullen ITM Blog bubbles long tails freedom

QQQ Chart

QQQ has also made new highs and is on an upward trend.

Heather Cullen ITM Blog bubbles long tails freedom

In perspective we can see that it has comfortably eclipsed the highs it made in November / December 2021.

Heather Cullen ITM Blog bubbles long tails freedom

VIX Chart

The VIX continues at a low level.

Heather Cullen ITM Blog bubbles long tails freedom

ITMeter

Heather Cullen Blog ITMeter

The week ahead . .

If we have a week like last week then I will not be complaining! Earnings season continues, most of big tech has already reported but there are some big non-tech results this week. Now (12 hours to market open) the futures are slightly negative, which is to be expected after such strong moves up on Thursday and Friday.

Heather Cullen ITM Blog bubbles long tails freedom

Thank you to all the lovely readers who sent me birthday wishes – so kind of you, I really appreciated them!

So – as usual – fingers crossed for a good week.

Heather

Comments, Questions & Answers

13 thoughts on “Bubbles, Long Tails & Freedom”

  1. I’m trying to duplicate your spreadsheet for ITM Bull Trades and noticed a few issues:
    1) Why are “Days in Trade” given for some of the buy rows?
    ie: 19-Aug-94, 19-Oct-94, and many more.
    2) “Days in Trade” is incorrect for 3 of the sell rows
    3-Jan-11 shows 364 but should be 102
    2-Jan-13 shows 359 but should be 33
    2-Jan-15 shows 365 but should be 65
    These three trades will no longer be <90 days to expiration and so each Premium OUT needs to be recalculated.
    The sell on 3-Jan-07 seems to be incorrect (unless I don't understand your process).
    66.78 * (15 * 100) + 294 = 100,170 + 294 = 100,464 not 102,469.
    Do you have an email that I can send my spreadsheet? If you'd like to see it.

    1. Hi Noel,
      1) why are some days in trade given for the buy rows – this date is simply the difference between the date that this event is occurring on and if 2 events happened on the same day (as in a roll up buy and sell) then the value is zero, and the spreadsheet displays the zero as a blank for readbility.
      2) when transcribing from one spreadsheet to anotehr there were 3 trades that were left out – I wrote about this in bmy blog at the time – more than 2 years ago I think, and I inserted them but didn’t update the backtesting online. Mea culpa.
      These were the ones that you have picked up. The days in trade are as you say, and I have adjusted the spreadsheet.
      3) again, the insertion of the 3 missing trades caused a problem in the formulas, which I have fixed.
      This makes the nes total $1,168,557 – an extra $77,583 in our favor. I thought that since it was even better results I wouldn’t change the figures in the book as it is good to underestimate results!
      I have a new backtesting system, which is fully documented and I will publish the documentation, and I am trying to republish the books with the up to date (2024) numbers, and based on the new system and new parameters, so there will be new numbers shortly.
      Thank you for pointing these out.
      h

  2. Hi Heather – So happy I found your books! ITM is a perfect fit for me in planning for retirement. Quick question as I look to start ITM with an IRA rollover later this Spring: Right now I’m having a hard time finding ANY DITM SPY call option that has an effective price within 1% of current, for either January 2025 or March. As far down as $240, well under 50% of current price, the difference is still 1.4%. I’m wondering if this has something to do with the decreased implied volatility? Is it best in this environment to simply go with the lowest strike with a 1.000 delta?
    Mike

    1. Hi Mike – I am addressing this in the book update which I am really hoping I can get published later this week. But – a sneak preview: the new option pricing is mainly due to the higher interest rates, so I have redone the numbers am going to recommend 50% strike and 1% time value and 60% strike and 2% time value. The details will be in the update but that may help you find the right option in the meantime.
      Hope this helps.
      h

  3. Hi Heather – I just finished reading your ITM bull market strategy book but I am struggling to find SPY contracts that meet the rules of a strike at least 60% of current price and effective price <1% of current price. Should I wait until the market levels out or do you recommend going higher on the strike until I find the sweet spot? Any guidance you can provide will be great!
    Karan

    1. HI – Just answered a similar question above. I know it is hard to get options that conform to the original books, written when interest rates were low. Here’s what I said:
      I am addressing this in the book update which I am really hoping I can get published later this week. But – a sneak preview: the new option pricing is mainly due to the higher interest rates, so I have redone the numbers am going to recommend 50% strike and 1% time value and 60% strike and 2% time value. The details will be in the update but that may help you find the right option in the meantime.
      Hope this helps.
      h

      1. Thank you for responding, Heather! I went with the 50% strike and 1.5% time value. Your books are so easy to read and follow. I just purchased your book on reading stock charts and look forward to reading that as well. Thank you for all you do for us retail investors.

    2. I was about to comment on the same thing. Currently, at 60% (295 strike) has 2.0% time value and 50% (245 strike) has about 1.7% time value.

      1. Hi Noel please see anser abov – quickly, this is all in the update, but at current prices 60% strike / 2% time vale works as well as 50% / 1%.
        When I get over the current IT dramas I will explain more.
        h

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