Dipa Karmakar and the Risk Quandary

Before the start of this Rio Olympics, I am sure that less than one percent of people had even heard about the name of the Gymnast coming from a small state in North East India but by yesterday, she was a toast in the media with most of us hoping that she may defy the odds and provide us with the first medal. Finishing fourth is a proud achievement given the kind of support system she had versus the support system of other competitor’s and it’s entirely due to her hard work that she is now recognized and has made a name in the world of gymnastics.

But there is a dark side as well as Dipa was one of the only(?) gymnast in this Olympics to try out the artistic gymnastics vault called “Produnova” and is  only the 5^th to complete it successfully in a international competition. But as Wikipedia says and I quote,

“Controversy was sparked after Fadwa Mahmoud’s first competitive Produnova attempt, where she nearly landed on her neck.

As long as the gymnast lands on her feet first, she will get credit for the vault, and because of the Produnova’s massive difficulty value, it is easy to get a high score even with poor execution. This has led several gymnasts in countries that lack funding for gymnastics to attempt the vault in order to increase their chances of medaling and therefore obtaining more funding. There have been calls for the Produnova vault to be banned due to the high level of risk”

Now, compare this to the risk taken by amateur traders. Given that most of them lack capital, they essentially try to for broke by risking big and hoping that it pays off. Unfortunately that is seldom the case as most traders end up broke after a few such try outs as high risk never means high reward all the time since otherwise it couldn’t be high risk in the first place.

For a few months now, I have been tracking open interest data of FII’s and Clients and for me, it holds up as to how Institutions think versus how Retail folk think. For starters, FII’s are never short put options (Net) which means that they Buy Put options as an Insurance policy (as its designed to be) against their Long positions. Retail on the other hand are happy to be short Puts almost all the time.

In fact, since 2012 from where my data starts, they are short futures as well as short call options and furthered by long puts only 20% of the time. 39% of the time, they are Long Futures, Calls and Puts and 41% of the time, they are either Long or Short Futures and Long or Short Call Options while remaining long puts.

In markets history, there have been very few instances of a Market Melt up while Meltdown is an often repeated headline that occurs in a regular fashion and when such a incidence happens, you know how retail clients will be positioned.

The basic idea of having options was to provide a way to limit losses by buying Insurance but given the leverage it provides, it has been happy hunting grounds for those looking for quick bucks since it provides the kind of leverage no other product does.

While stocks can take months or years for it to return 100% return, in an option you can witness 100% and more within a single day and sometimes within a few minutes. No wonder that it attracts clients who are more than happy to stake a bet hoping that lady luck favors them.

The fact that you are risking 100% of the capital posted since it can as well as easily (and normally) does goes to Zero is often overlooked with the premise being that you lose only what you bet and no more.

In the Race Course, in a Casino as well as in the Lottery business it’s always the bookies who end up on the winning side all (or almost all) the time. While there will always be a few winners in extreme short term, over the long term the only guys going to the Bank to deposit their winnings are those on the other side.

Both in the Casino and the Options market, it seems that both the Player and the house have equal advantage but as everyone knows, “The house always Wins” even though its edge is not too great. In the derivative markets, it’s said that 95% of all options expire worthless but that doesn’t mean that option writing is an easy way to generate profits. I should know it better since nearly a decade back; I nearly went bankrupt writing options. Victor Niederhoffer blew his fund as well as personal money selling put options. Nick Leeson blew up Barings Bank selling put options on the Nikkei among many other disasters (mostly of the unspoken kind).

I find it amusing when experts say, “Risk only money you can afford to lose” which to most I am sure seems to suggest that it’s better to invest in Gold / Real Estate where such investments do not merit such statements (though the same, heck, even bigger risks exist in those asset classes).

Everyone who has made it big has risked it all (thanks to Survivor Bias, we can safely ignore those who failed), be it in Land / Gold or going solo (Entrepreneurship). But risking it all doesn’t have to mean losing it all – there is a wide difference between those two and the key to survival (remember, Survival not Success) is to understand that difference.

Motilal Oswal has a motto that says “Bet Right, Sit Tight”. I on the other hand think, Bet Right (at least hopefully its Right), Bet Big (no point scoring a few pennies when you are right, Right?) and be ready to change your view if the market doesn’t move in the direction you assumed it would (Sitting tight is equivalent to sticking one’s head in the sand and hoping that the storm will eventually pass over).

As much as I wish Dipa Karmakar well, I do hope that the lessons future gymnasts not take from her success is to try out the most risky moves in an attempt to win honor and medals.