Chingo De Dinero

A lot of people talk about options and know the power in the amount of leverage you can get with them.  The one area where most of the people I talk to lack knowledge is how to price stock options.  If I ask if the option is cheap or expensive, the give me the blank look.  If I ask about implied volatility I get an even funnier look.

In short, the price of stock options boils down to implied volatility, which is more or less the probabilities of wide variations in the underlying stocks price.  Using Black-Scholes which is more or less the space under the normal distribution curve that shows the probability at different prices for the underlying stock.  Less volital, the taller, thinner the curve is.  As volitility increases the wider the curve is.  So, as you get an option away from the current stock price, the area under the curve is larger when the volatility is higher.

If you are not familiar with this, I doubt my short explaination will help much, but it should plant some seeds which will make more sense as you research.

Sometimes when you commit a crime, you should sit in jail and reflect on what you have done, so in the future it will not happen again.  If you are simply let off you will not understand the extent of what you have done.

This is no different from the banking bailout now.  If the government takes responsibility for what others have done, those who made the mistakes will do it again.  Many times this is called moral hazard.  If I know someone will catch me if I fall, I will take risk which I normally would not take.  Although it is nice be caught when you fall, is comes at a cost, and inflicting that cost on those who are not willing is a violation of their rights.  There may be some trickle down, but it will not be as bad as if there is a bailout and risky actions are still taken, and we find ourselves in the same situation in the future.

I recently read a quote form a congressman that when he started Chrisler was going into bankruptcy, and the worry was that they could go bankrupt, and they needed to be saved.  Here we are again, and issue.  If they would have fallen the first time, there would have been room for a better company to step up, and we would have been better off.  Instead, they were bailed out and squeezed out new competition, only to mess it up again.

All the argument should be is does the calapse of the financial industry violate anyone’s rights.  The clear answer is no, but forcing people to pay for a bailout is clearly a violation of individual rights.  All of the arguments about the trickle down and the positive possibility of the assets being worth more than they are bought for are wrong, and just a short fix.  Kind of like when you get a wish from the geniue in the bottle, you make your wise, get it, but the unexpected side effects are worse than what you have gotten.

Don’t bail out the financial industry.  It may hurt for a little while, but we will make it through it and will be stronger after.

One important aspect which I left out of “Push vs Pull” was the dynamic aspect of the economy.  The rules of the game determine how people play.  A result of the push method is the inability to improve the amount of resources you control.  In plan terms, you are taxed so hard that even if you work harder you will not have more money.  People are not dumb, if they are in this situation, they work less, be it right or wrong, we are here for us, and are all concerned about ourselves.

So, not to get too deep in social theory and what is best, economically there is an impact.  People will work harder in a pull system because the harder they work the more resources they can control.  These resources could be directed towards a new car, bigger house, cure AIDS, help the poor, or any other activity.  Over time, the effect of this additional work can become very large.  If you look to the basics, “The Wealth of Nations” one of the main aspects that makes a nation wealthy is private property.  When you have private property, you can accumulate resources, and control them, which makes you work harder, which in turn generates wealth for the nation.  Additionally, we are more likely to invent or innovate.  If I know I can become very wealthy if I work hard and think of the next great invention, I will work harder to do so.  Maybe I will stay up later than normal, sacrifice sleep, sacrifice parting, etc.  If it would not see the benefit of my work, I would be more inclined to relax, enjoy life, and live for today.  Resulting in the invention never materializing.

In my opinion this result of choosing an economy is just as large as the “fairness” in allocating resources.  It is an investment in the future, which will pay large dividends and benefit society as a whole.

If you have been to Venezuela recently you will know about their currency control.  If you have read about business in Venezuela recently you will know about their currency control.  It is one of the craziest things on this earth.  So, the government says the exchange rate is 2.15 Bolivars Fuertes to 1 dollar.  But, if you can do DPN transactions or exchange in the informal market, it is maybe 4 Bolivars Fuertes to 1 dollar.  So, how does this play out and who is hurt/helped.

The basic way to control the currency is by requiring all exchanges to be done by the government (CADIVI).  You can imagine how slow this must be…all businesses needing to send funds overseas much go through a government organization.  6 months waiting on cash, the supplier will not be too happy about that.  Less quantity supplied, higher prices, Venezuelan people hurt (#1 loser).  That is why yearly inflation is around 30%, they are also spending the oil money like crazy.

Also, the government must convert the Bolivars to Dollars to pay the suppliers.  They convert at the official rate 2.15, when they could you the unofficial 4, 1.85 in loses on each dollar traded (#2 loser).  Of course Venezuela produces Bolivars, so the impact is not really direct.  Additionally, citizens have learned how to get a piece of the pie, they travel, and max out their credit cards to get cash back…in casinos, or special shops set-up for this.  They then come back and convert the funds to Bolivars at the unofficial rate, and pay off their credit cards which convert Dollars to Bolivars at the official rate.  Easy way to make a few thousand dollars.  To limit this, the government restricts the amount people can spend on their credit cards overseas to 5 KUSD per year (#1 winner).  If they want to spend more than 5 KUSD, they must convert their Bolivars to Dollars at the unofficial rate (#4 loser).

The big winners of this are those who have access to convert Bolivars to Dollars at the official rate, then convert the Dollars to Bolivars at the unofficial rate.  There seem to be some banks who can do this, mainly because of close contact to government officials (#2 winner).  I am searching for a way to do this, if I find it, I will write a book about it while in the Bahamas so you can learn it too.

To sum, the government has fixed the exchange rate, which creates more bureaucracy, a tougher business environment, make a few people extremly wealthy, and screws the every day Venezuelans.  So much oil, and the government has found a way to keep the people poor.  My advise, open the market, put reasonable taxes on oil.  Cut all other taxes to 0.  Reduce government, and watch the growth.