10 Jul 2021
Unknown Market Wizards - Social arbitrage by Chris Camillo
Did you leave so that you could trade full-time?
Yes, and that was dangerous for me. It is something I have struggled with ever since. Looking back, I think a big part of my success when I went back to trading was my ability to look past the noise and be patient. I wasn’t in the industry.
It wasn’t my job, and I wasn’t under any pressure to trade. I could go six months without a trade, and I didn’t have to answer to anybody. My biggest mistakes over the years have always been a consequence of trading too much.
If I just stuck to my highest conviction trades, I believe my account would be tenfold what it is today. My methodology works best when I identify a significant piece of off-radar information that allows me to have a tremendous amount of conviction going into a trade. And that doesn’t happen very often. It’s very difficult to say, “I’m going to wait for a high- conviction trade and not do anything for the next three months.”
Can you elaborate on your methodology for identifying those high-conviction trades?
I call what I do “social arbitrage.” What the word “social” means to me is that it is something not financial. My trading is dependent on my ability to identify meaningful off-radar information early—information that is either not recognized or is underappreciated by the investment public. In some ways, my focus was the inverse of what it was during my garage sale years. In my purchases at garage sales, I was focused on male-oriented items that female garage sale organizers had mispriced. I quickly realized that a lot of the biases on Wall Street provided opportunities for me to identify information that was either female-oriented, or youth-oriented, or rural-oriented. I don’t want to say that my methodology is totally dependent on those areas, but in my earlier years, it focused on those areas. I immersed myself in fashion and pop culture—things that are entirely off the radar screen of the typical Wall Street trader or fund manager.
Do you typically use options to express your positions?
I will use options when there is adequate liquidity, and the option price is reasonable.
In what percent of trades are those conditions fulfilled?
I guess you use options to leverage your trades? Yes.
Do you use out-of-the-money, at-the-money, or in- the-money options?
It has changed over my trading career. I used to use more out-of-the-money options. Now that my portfolio has grown over the years, I tend to use at-the-money or in-the-money options. But if it is a very high-conviction trade, I will occasionally invest in out-of-the-money options as well.
What percent of your account equity might you commit to a single trade?
On a high-conviction trade, I could put in as much as 5% to 15%, knowing that I could lose the entire amount, even if the stock doesn’t decline by much.
How far out do you go in your option positions?
以前赌财报，由于对手盘可能会提前知道销售信息，现在会把期权的时间提前 before the earnings date
I attempt to determine what the information dissemination event will be. Usually, it is an earnings report. These days, as Wall Street is getting smarter about identifying off-radar information sooner through credit card or other data, a lot of the information that I trade on will become known before earnings. So, sometimes, I will buy options that expire before the earnings date to save money on the option premium. In those cases, I actually hope that the market will see what I see before earnings.
What happened to the remainder of your Under Armour position?
The Under Armour earnings came out, and they were right in line with what I initially expected. The ColdGear sales were phenomenal, and I don’t remember exactly how much the stock went up, but it was probably close to 20%. I ended up making a ton of money on the trade, even after the losses I took on the two-thirds of the position I had liquidated previously. If only I had kept that position.
But you ended up making a lot of money. Why is that trade so painful?
Because I let myself be swayed out of most of my position when I was absolutely right. I regret that trade so much.
How did that change you?
It showed me that this game is all about confidence. I should not let extraneous factors impact my confidence. I know what I should be doing, but doing it is a different thing. I used to have this thought about the market that, “They must know something that I don’t know.” That is a thought I have continually tried to shake off. After the Under Armour trade, I walked away saying to myself, “Don’t ever, ever get shaken out of a trade by thinking they know something that you don’t.”
Do any other trades stand out as providing a particularly important lesson?
Not long after the 2008 election, Michelle Obama wore a yellow J.Crew dress on Jay Leno’s Tonight Show. I watched that episode. This event was one of the most defining moments for J.Crew in a decade. After that show, Michelle Obama was on the cover of almost every tabloid and fashion magazine. Immediately after that, the African American demographic completely embraced J.Crew as a brand. I totally missed that trade.
How did you solve the problem of missing the majority of trade opportunities that were theoretically identifiable using your methodology?
Going on Twitter and Facebook to manually look for things that I thought were happening was very inefficient. I thought, “What if instead, I could structure all the theoretical words and word combinations that would represent anything that would be meaningful to any publicly traded company?” Those terms would include the name of every significant publicly traded company, every CEO, every product, every brand, every technology, every cultural movement, and every government regulation that could affect a company. Essentially, I needed to figure out the name of anything that could impact a company in any way that someone might speak or write about. I called these word combinations “ticker tags.”
When you get a volume spike in one of your tags, couldn’t it just as well be bearish as bullish?
I look at the context of the conversation. It doesn’t take long to determine the narrative. I will never trade on data alone. Every trade I do has a thesis with a narrative associated with it. I will use a trade I am in right now as an example. About two months ago, I noticed a conversational spike in e.l.f., a manufacturer of low-priced cosmetics, that hadn’t been doing too well in the past few years. That alone didn’t tell me anything. Was there a spike because people liked a product or because they were complaining about a product? Some further checking revealed the spike could be traced to a video made by a makeup tutorial artist named Jeffree Star, who has 15 million followers on YouTube. Jeffree had made a video where on half his face, he used an e.l.f. product that is sold at Walgreens and Target and costs about $8, and on the other half of his face, he used a top-selling product that costs $60. He said that the $8 product was as good as the $60 product. He instantaneously changed the consumer perception of the e.l.f. brand from being viewed as a cheap drugstore product to being considered a quality product. The stock moved up more than 50% in two months. The odd thing is that I bet that most analysts who cover e.l.f. have no idea who Jeffree Star is.
If I were a kid today, I think I would be diagnosed with ADD. I feel my ability to focus on subject matter that is of interest to me is my number one strength. The type of analysis that I do requires an immense amount of work for something that often doesn’t have any immediate payoff. I could go for months without finding a high-conviction trade.
Is ADD the right term? Isn’t ADD the inability to focus?
I disagree. ADD is the inability to focus except for those things you have an innate interest in, in which case, it works exactly the opposite.
Any other important traits?
Patience. I know some trading opportunity will pop up at some point, but I don’t know when it’s going to be or what company it will be. I know that if I keep on doing what I do every day, it could be tomorrow, or it could be four months from now, I will hit something. I just need to have the patience to wait for that trade.
Are you naturally a patient person?
Quite the opposite. I had virtually no patience when I started trading. Patience is something that I have slowly developed over the past 15 years. Today, I am a much more patient trader. The type of strategy I use requires extraordinary patience. Ideally, with my methodology, I should be making a trade only once every couple of months, and it is hard to have the patience to trade that infrequently after doing all the daily work I do. It’s still a struggle for me.
Can you describe your trading process from getting in to getting out?
Whenever I come across a piece of information that I think the market doesn’t know or is not paying attention to, I have to determine whether it can move the needle for the company.
Sometimes the company is so big, and the information is so limited in scope, that it doesn’t make any difference.
If I believe the information could potentially be significant, I then have to determine to what degree it has already been disseminated to the investment public.
If it’s already market knowledge, then I have to assume it is reflected in the price.
If the information is both significant and not yet disseminated, I then have to research whether there might be any extraneous factors that could meaningfully impact the company during the time window of my trade.
如果该信息非常重要同时并未被众人所知，我还必须研究可能在交易窗口影响我的非直接因素 extraneous factors
Is there any impending lawsuit, or management change, or new product line, or anything that could trump the information I am trading on? Once I have excluded all the factors that could nullify the relevance of the information, I then conclude there is what I term an “information imbalance.”
What is interesting about this methodology is that I apply it completely blind to other fundamentals in the company and the price action. I don’t care if the company is overvalued or undervalued.
I assume that the stock is trading relatively efficiently on the information that is out there.Then once this new information is added to the picture, the stock should adjust accordingly.
The last step is to define the trade window so that I can determine the appropriate option to purchase.
For example, if I were trading Disney based on the expectation that a new movie would be a larger-than-expected hit, I would buy options that expire beyond the opening weekend. I want to select options that expire as soon after the expected information dissemination as possible to keep my option premium expenditures as low as possible.
Typically, the option expiration will revolve around an earnings report, but it could also be determined by a product release or the availability of transactional data that can be used to anticipate earnings. If there is a reasonable expectation for information parity before the release of earnings, there is a distinct advantage to purchasing options that expire before earnings, since their prices won’t need to embed the extra volatility surrounding an earnings release.