The Professor | Reminiscences of Sang Lucci Part 2: Holy Grail

By Charlie Bathgate Psychology

By Charlie Bathgate

For this series celebrating the launch of the Sang Lucci Master Course, we went through the analytics and pulled some of the most popular posts from Sanglucci.com history. Each one touches on an aspect of what’s covered in the course. Enjoy!

“There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!” Reminiscences of a Stock Operator

You can read our introduction to this series in Part 1.

Alright, let’s jump right into the next story here. How about we discuss the infamous Citigroup trade? Where were you in your career at the time of the trade?

The markets changed significantly after the uptick rule got scrapped in 2007. Regulation NMS also went into effect, which was a consolidation of rules affecting the National Market System. Without going into too much detail about the specifics of these rules, let’s just say that it had a profound impact on the way stocks traded. Coincidentally, this is also the starting point of yet another boom in algorithmic computer trading.

Spread across 3 different locations, there was about 50 traders in total at my prop firm, 20 that were profitable. After 2007, the main strategy employed and taught by the firm was no longer effective because the strategy utilized a unique and proprietary advantage over the uptick rule. Once the structural changes of the market went into effect, every trader had to devise new strategies and essentially relearn how to trade profitably. Traders started dropping like Time Warner internet service. I saw guys that I looked up to that were making $15K/month unable to scratch out winning months. Since I started in early 2007, I wasn’t strapped to any particular strategy. I developed my own approach after hours of studying tape every night for months.

By early 2009, the firm had shutdown completely. There were rumors being spread around the office weeks before about the bosses running into buying power issues. Apparently, the head traders were taking a beating on their individual accounts and with the way prop firms were structured before regulations came down, everyone worked on pooled leverage. That means if one trader took a million to the face, the buying power faucet turned off.

For days, my boss kept saying we weren’t closing. Then one day we all showed up to work, and the door was locked. That was all we ever heard about it.

I was on my way out anyway and had already started trading a larger personal account shared with my father. I was making money swinging large equity positions in beaten down names from the crash. That’s when I came across Citigroup in the summer of 2009.

What was going on in your personal life at the time?

I was on the grind harder than I ever was. I was arrogant at the time because I had already made at least a half million. I was actually going out a lot and finally enjoying the fruits of my constant toiling in the markets. My father, after taking a horrific beating in the markets, was finally feeling more optimistic about his situation. I have to say that life was good in 2009, but beneath it all there was a surge of pressure that I threw on top of my shoulders. The constant desire to make millions was stressful and I have no one to blame for that but myself. It is my biggest strength and weakness, at the same damn time.

What happened in the trade?

I had been trading options on the SPY for a few months trying to figure out how to move considerable size. The banks had all rallied except for Citigroup which was ‘the dog with fleas’. After a dismal spring where the market went into chop mode, we broke out on a new trend higher in early July. The money flow came into the banks fast but Citigroup just couldn’t find a buyer. The stock was under $3 and I started buying August monthly call options at the $4 strike. I had a good cushion of profits already for the year so I was ready to get belligerent in something. I bought contracts everyday stubbornly from $.02 up to $.06. I amassed over 70,000 contracts.

At one point I was down about $150K and had to bury some of the options. But then the stock gapped up and the option hit about $.09. The day after that she kind of chopped around with the option hitting a high of $.15 and dropping back to $.08. I was selling 1000 lots through all of this and taking loads of profits off the table. Then the stock ripped clean towards $4 and my option skyrocketed up to $.40. I sold 1000 contract blocks every cent from $.20 to $.39. The next day I watched the option go to $.72. I netted around $1.2 million and then went back to the well a few weeks later to hit the move to $5.

What did you learn?

Timing is everything, and big bets like this can happen often if your tape reading skills are on point and you understand the nuances of the current trading environment. More importantly, I learned what I wanted my strategy to be. The premise of the new game was simply to time a big picture move on a particular equity or sector alongside a breakout/breakdown in the indexes. When these types of moves are timed properly with the market, you get an explosive move in the options space as the market makers step completely out of the way and let the contracts go to the moon. The difficult part with this strategy, though, is that this happens when you least expect it and often times when a majority of participants are positioned in the opposite direction.

This strategy would become the basis for my whole trading career to come.

Take it home with Part 3…

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About the Author

Charlie Bathgate

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Charlie Bathgate is the man behind the scenes making sure everything runs smoothly. He’s also the resident psychology fanatic. He graduated from Duke University in 2009 with degrees in English and Business.

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