Byrne's Eye View

A few months ago, financial writers started muttering about how most hedge funds were just looking for clever ways to sell puts. Put-selling is a great strategy if you're paid on performance and don't care about ethics, because, done right, it means you'll make more money with lower risk for a while, until you blow up. The math is pretty simple: out-of-the-money options expire worthless most of the time, and occasionally pay off massively. A put-selling strategy could be calibrated so it returned 15% a year, guaranteed, unless there was a March 2000 or 9/11 or Summer '02 or August '07, in which case it would lose a very lumpy 50%. A great deal for the manager making 2% of assets and 20% of profits, because he's earning roughly 5% on assets most years, and giving nothing back when he blows up.

But not all hedge funds behave that way -- a good quant fund might just be a way to sell expensive puts, which would have the same performance characteristics with higher peaks and shallower valleys (this seems to describe quant funds pretty well). And hedge funds aren't the only ones playing that game. Thus, I present the world, in options trades:

Buying calls: Artists, musicians, entrepreneurs, venture capitalists, and trendsetters whose trends don't always catch on. Anyone who is trying to do something useful and original, and is probably going to fail. Basically, the Bohemians.

Selling calls: Critics, media distributors, intellectual property trolls, heirs, heiresses, and anyone trading on influence over talent. Anyone who is extracting rents from a dying business or a diminishing capital base. In short, the Establishment.

Buying puts: Macro fund managers, survivalists, and basically nobody else. Oh, yeah: Goldman Sachs. Summary: misanthropes. Won't be invited to any parties, but every so often they're the only ones who can afford any parties at all.

Selling puts: Banks, quants, closet index-fund managers, anyone with a get-rich-quick scheme that works. But these guys aren't even a small fraction of the story: there's one entity that seems to sell very low-risk insurance to anyone who asks -- it's willing to bail out people who build houses in the paths of hurricanes, people who buy houses for twice what they're worth, people who make the loans to buy those houses, people who build terrible cars, people who make the expensive steel that goes into less terrible cars, and anyone who has lost a job or lived long enough to quit without saving up the money to do so. And, oddly enough, it never sells puts for cash when it can just sell them for votes.