The following is the OptionBT sighting of    "Magic Marker".
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Title   :   "Magic Marker"
Position Description  :
     Position taken   :     June 05,2008
     18 months out,
     Vertical Bear Put Spread
     Long the 09 Dec 1700 Puts (8650 cnt), Short the 09 Dec 1500 Puts (8650 cnt)
     No Margin required,
     Close on the day of trade June 05,2008 was 1404.05
     Expiration/Settlement    :    December 18,2009 / Settlement = ????

Count   :                     8650 long put options, 8650 short put options.

Credit or (Debit)   :     ($106,395,000)
Margin   :                   none required

Results   :                   Net Potential = +$66,605,000 if December 2009 Settlement below 1500.0

                                       

Comments   :   "Magic Marker"

The large felt tip pens known as "Magic Markers" have been around since their invention in the early 1950's.
They have a distinctive smell and make a squeaking sound.

The "Magic Marker's" position cost $106,395,000.
By almost any measure this is a lot of money.
However there is more going on here that needs our attention.

"MM" has a lot of cash and a plan. Illogically, there are always sellers willing to fill the 8650 count of the 09Dec1700 puts which make up "MM's" long side. For the short side (the 09Dec1500 puts) "MM" seeks a buyer who may very well agree with "MM" in thinking the market is going to tank. This short side buyer is at risk too, but his $160,025,000 worth of puts may well be either laid off or become part of another strategy which need not be created simultaneously with this position.

Since we have some time until December 2009, there is ample time to discuss the different ways which "MM" may use to return the $106M he is currently out of pocket into his account.

At the very least "MM" can just hold until expiration and hope the market doesn't surprise him.

The other way to exit involves a partner.
The only symbiont out there is the "GapMan".
He is the only one willing to purchase the large quantity of very expensive deep in the money puts that "MM" possesses.
At a mutually agreed time, the "GapMan" will magically appear and buy all 8650 of "MM's" 09Dec1700 puts, buy an equal number of 09Dec700 calls and sell 8650 each of the 09Dec700 puts and the 09Dec1700 calls.
Of course "MM" doesn't have the 09Dec700 Calls that the "GapMan" needs (or does he?). What if "MM" were to short the 09Dec700 Calls into the "GapMan" at the same time that he sells him the 09Dec1700 Puts? This would latch "MM's" 09Dec1500 short Puts which will be uncoverred with the sale of the long position in 09Dec1700 Puts.

"MM" may opt for this plan, but there are pluses and minuses.

This more sophisticated exit strategy which requires that "MM" short a count of 8650 09Dec700 calls into the "GapMan" is shown on the table below using the close of business bid and ask for December 30,2008.
Buy (SZVXA) 09Dec1700P -308 BTO original position
Sell (SZVXT aka SXMXT) 09Dec1500P +185 STO original position
Sell (SZVXA) 09Dec1700P +809 STC 30Dec2008
Sell (SPZLT) 09Dec700C +236 STO 30Dec2008
Net of above = +922
Settlement Obligation = -800
Final Net = +122 => (12,200 * 8650 = 105,530,000)


What this does is leave "MM" short the 09Dec1500 puts and short the 09Dec700 calls with an obligation at settlement of $80,000 per pair. For the 8650 count this becomes a staggering $692,000,000. Gulp!
Remember that if he does what is shown in the table he has $797,530,000 in his pocket now and doesn't have to return any of it for nine months.

So what is wrong with this?
Only one little problem, there is no Gap.
The cost of the 09Dec1700 Puts plus the cost of the 09Dec700 Calls is greater than 800.
If there is no Gap, there is no GapMan.


"MM" paid 123 points (-308 + 175 = -123) for his spread and therefore only has 77 points to play with. If there is to be a GapMan in the end game he will have to give back a lot for his participation. Right now he is not worried about that and will be content to weather the storm. Especially with the slide in the market which occured in late 2008. He will sit tight for now.

So, who's the big looser? It's not the Magic Marker.
It's not the GapMan (they never loose).
It's the poor enabler who didn't see the downturn coming and shorted the 09Dec1700 puts into the Magic Marker. The enabler did have a large amount of "MM's" cash in his possession shortly after the trade. Let's hope he acted fast and wasn't left holding the bag. The bag right then had $266M in it if he only covered the long side or $106M in it if he covered the whole position. These numbers while large will evaporate quickly if he continues to be short the 09Dec1700 puts.

Although not done yet, this position looks like a winner. The "GapMan", who probably offices across the hall, will patiently await his call to action which if it comes will be about three months out from expiration. Hopefully, the enabler has ducked out of the 09Dec1700 puts (although this is not necessarily that easy) and held on to the 09Dec1500 puts (if he covered that leg as well) which have greatly advanced later in the year.


The "Magic Marker" appears rarely, but when it does, it has the highest rate of a positive result of any member that has ever appeared in the list of Candidates to the BFHoF.
Traders like "MM" are at the top of the food chain. It is important to watch for them and act in concert with them.

When you hear the squeak of the Magic Marker, get on board.




Updates:
COB October 16,2008 @ curr bid/ask position +$50,701,980.
COB December 30,2008 @ curr bid/ask position +$60,031,020.


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