The Lottery And/Or The Con
On the literary potential of the stock markets, real options, and John D. MacDonald as gurudev
How would you like your money to double in a year?
This is not the kind of question you gave this substack the subscribe for. I promise, though, that we will find our way to literature. For the start today, however, I wanted to take a different route, that of a story that has been with me for a few weeks now, a story from a world that appears, at first glance, as far away from the world of literature as conceivable. This is the world of capital markets and derivatives and the impact of regulatory action on the prices of securities. Sounds complex? Sounds unappetising? Hold on. Let me repeat the question I started the post with.
How would you like your money to double in a year?
Not bad, right? I think you’d love that. Anyone would. I would.
How about doubling your money in a day?
Ok, that sounds implausible. And scammy.
How about increasing your money by—wait for it—more than 75 times overnight?
Yes, you heard that right. 75 times. 75x. Multiplication.
Surely you think I’ve gone bonkers. But this has happened, dear reader. Recently. In India. Let me tell you when and how.
On April 24, 2024, after stock trading hours, the Indian banking regulator barred Kotak Mahindra Bank, one of India’s leading lenders, from selling credit cards and acquiring new customers through its digital channels. This was owing to a failure on the bank’s part to address issues in its IT systems, as pointed out by the regulator in examinations during 2022 and 2023.
The order came, note, after stock trading closed on the day, which meant that the adverse impact on the bank’s stock price would be effected on the opening of trading hours on the following day, ie., right at 9:15 a.m. on April 25, 2024. Everyone expected the stock to fall by 10%, which is the maximum change allowed by the exchanges for this stock in a single session. This played out as expected.
Back on April 24, minutes before the trading hours closed, the Kotak Bank share was trading at ~1840 rupees. A Put option for the share for strike price 1820 was available for 2.35 rupees. One needed to place this bet for a minimum 400 shares, which means that the minimum investment to buy this Put option was 2.35*400 = 940 rupees.
A Put option is a contract that gives the buyer the right, but not the obligation, to sell a certain number of shares (400, in Kotak Bank’s case) at a determined price (1820, in the above example). It is, in effect, a derisking measure to prevent erosion of investor wealth in case a share’s price drops.
In you still haven’t understood the earlier paragraph, just know this: A Put option on a share is a contract whose value INCREASES as the underlying share’s price DECREASES.
Now to repeat: minutes before the market closing on April 24, a certain Put option based on the underlying Kotak share price was valued at 2.35 rupees. Your minimum investment if you wanted one of this Put option at that moment would be 940 rupees.
The next day, the underlying Kotak share price dropped as much as it could drop (ie, 10%). What happened to the Put option price? It surged. It surged to 183 rupees!
Now consider the fella who on April 24 bought the Put option for 2.35 rupees and found it to be worth 183 rupees the next morning. Their 940 rupees bet (2.35*400) became 73,200 rupees (183*400) overnight! That is a profit of 7687%. In less than 24 hours.
Is it possible to have more drama in life?
The above example is one of numerous such astronomical-rise scenarios in the Put option contracts on the Kotak Bank share on April 25. The rise was plain to see for traders on their stockbroking applications. On Twitter, a trader reported seeing a Kotak Put option at >1,00,000% profit. News websites later reported on the same phenomenon, including a claim by another trader that an insider might have turned 1,000 rupees into 2 million over one day (Firstpost story).
To my novelist mind—which is also a business-school-trained mind—there are extraordinary dramatic possibilities here. I see two different kinds of stories possible, perhaps because two kinds of people might have enjoyed this life-changing trade:
Those with truckloads of blind luck, who due to a whim, inspiration, or god-whisper, ended up buying a nearly worthless contract on April 24, only to see it transformed into a big stash of money on April 25
Those with crazy privilege, who, on April 24, knew what was going to happen after trading hours on that day, and therefore acted swiftly (and illegally) to print a fair bit of money the next day
The story I imagine for the first kind of person is what I call ‘the lottery story.’ A person wins big, life-changing money due to no particular talent of theirs. There is the initial delirium. Then, as news spreads, their social relations begin to alter. The person develops anxiety about managing money. They feel tempted to try out their luck again. From here, the lottery story can take comic or tragic turns; it can be a story about the corrupting influence of money or a story about how closely money is tied to social worth.
The story I imagine for the second kind of person is ‘the con story.’ Here, to make use of the classified information they possess, a person with privilege needs to maintain deniability and therefore has to rely on a trusted party to be the front for their plan1. Thereafter, the story can take multiple directions:
The procedural (A): an investigator establishes the details the of con
The con inside a con (B): the trusted party proves themselves to be untrustworthy and runs away with the whole moolah, which turns our person with privilege into a murderous ball of rage
A and B combined
…
In my last monthly War and Peace post, I moaned about a general aversion to money or money matters in the contemporary novel. The money matter discussed here today—with its Put options, its falling share prices, and its timing of trades—is several degrees more complex than just an enunciation of characters’ finances (which is what I’d made a wish for in the earlier post). The money matter today involves speculation on the existence of a possible short-term money machine. It involves dizzying gains. It involves the possibility of a con. A get-rich scheme like no other. There is an undeniable allure in turning this kind of money matter into a literary matter, but it would surely require dexterity in handling complex details. Novelists are increasingly blase about money, so it is perhaps a bit too much to ask them to make stories out of such complex shenanigans.
Curiously, though, our desire to consume stories with elaborate cons, and to minutely observe the processes of the con, is high, and is being serviced amply in the visual medium. Two of the most popular shows in India recently, Scam 1992 and Farzi, derive significant payoffs from illustrating the complexity of the cons that their main characters are involved in. It’s interesting, then, that Indian novelists remain in a state of not being tempted by such stories. It’s interesting also that, while literature-types moan about big capital and its deleterious effects in generic terms, they avoid understanding, and making fodder from, the specifics of the crazy drama that is capitalism.
You can imagine my delight in finding a novel that builds a plot around a complex money matter. I’m reading John D. MacDonald’s Bright Orange for the Shroud, which involves an option contract as one of the constituents of a con. Published in 1965, the novel is the sixth in Macdonald’s famous Travis McGee series of novels and is generally considered one of the better ones. I bought my second-hand copy from Blossoms Bookstore, Bangalore.
MadDonald was a graduate of the Harvard Business School and often used his knowledge of financial terms and machinations to build stories involving elaborate cons or scams. Clearly, he is a man whose work I was destined to discover and love. I would have liked to come to his work sooner.
In Bright Orange, the con involves what is called a real option. Whereas the Put option in the Kotak example had as underlying the Kotak stock, a real option typically has something more real than paper—land, intellectual property, machinery, and so on—as underlying. In Bright Orange, for example, the real option is built around a sixty-one thousand-acre parcel of land, for which a syndicate is keen to purchase an option to buy for a pre-decided price of 120$/acre. The option is offered for two years, meaning that the actual purchase of the parcel of land can be effected any time during two years. The money that the syndicate has to pay to enjoy this option is 30$/acre2.
Here’s how the option is explained in Bright Orange, which, note, was a pulpy crime novel with no high assumptions regarding the smarts of its readership:
The syndicate was going to negotiate the option of it on a two-year basis at thirty dollars an acre against a purchase price of a hundred and twenty an acre. As soon as they had a firm option, he and another group were setting up a development corporation to buy the tract from the syndicate for three hundred and eighty dollars an acre. It meant that, after taking off syndicate overhead and operating expenses, the members would end up with five dollars for every dollar invested in the option—which would come to one million eight hundred and thirty thousand just for the option […] He said that his staff had investigated every aspect of the plan, projected growth, water resources and so on, and if we could just get the option, it couldn’t miss.
The syndicate lures the about-to-be-conned party to contribute to the 1.83 million dollars needed to buy the option on the land. There is, of course, no option and no land, and the syndicate’s aim is only to vanish with the conned party’s money. The main reason why the victim here becomes the victim is, I believe, the complexity of the hypothetical money machine. In the novel, Travis McGee will, of course, help the victim get their money back from the syndicate. Often, to draw confidence men out of their lairs, one needs to set up a con of one’s own. I’m keen to see how MacDonald builds that second con in the novel.
And, of course, I wish to see more Indian novels like this in the future. Those that make use of the dramatic potentials in our legal and financial structures, and do not shy away from complexity.
In the Kotak example, if an RBI employee tells his sister’s father-in-law’s brother’s daughter’s husband to buy Put options on April 24, then the RBI employee is the person with privilege and the relative is the trusted party.
Note that I’m not saying this happened; this is just an example!
When a novel is optioned for cinematic adaptation, the contract structure is similar.