Pulling Back the Curtains on the Buffett-Robinhood Beef

Hello, Profit Takeover team!

In this space so far, we’ve gone back to the basics with primers on bullish and bearish option buying, which is the bulk of my strategy in this service… In fact, you’ll get my next free trade idea tomorrow, so stay tuned!

I’ve also answered a few of your questions so far, and plan to address a few more from the Ask Me Anything inbox on Friday…

In addition, we’ve gone over my three-pronged approach to taking over Wall Street, which includes:

• Making volatility work in my favor and being selective in my strikes
• Hunting the best setups with asymmetric returns — or those with a favorable risk/reward backdrop
• Attempting to find the “sweet spot” of Wall Street, where retail-level interest meets institutional participation, essentially giving me “two-factor authentication“

But along with the education and trade ideas I’m providing, I’ll also be giving you my perspective on topical things that relate to my trading.

After all, I’ve got almost 20 years in the game now, and about half that time I was on the actual floor, and even helped create the VIX — also known as Wall Street’s “fear index.”

I feel I offer a pretty unique viewpoint; I’ve been in both the David and the Goliath camps.

And today, I’d like to not only dive into the unusual options volume I’m watching… I’d also like to touch on a Warren Buffett headline that caught my attention this week.

It’s something that’s extremely pertinent to one of the three aforementioned pillars of this trading program.

My Stance on Buffett vs. Robinhood

The headline that caught my eye came courtesy of CNN.com, and read, “Robinhood fires back after Warren Buffett slams free-trading app“.

Courtesy of CNN.com

Here’s what happened:

At Saturday’s annual Berkshire Hathaway (NYSE: BRK.A) shareholder meeting, the “Oracle of Omaha” said Robinhood very much contributes to the casino-like atmosphere on Wall Street these days.

In addition, Buffett doesn’t like that the Robinhood business modelis based on options-trading and order-flow revenue, all the while allowing retail traders to place multiple stock trades a day for free.

In fact, he’s eager to read the company’s Securities and Exchange Commission (SEC) regulatory statements once Robinhood goes public later this year.

While Buffett admitted there’s nothing “immoral” or “illegal” about the app, Berkshire vice chairman Charlie Munger was a bit less diplomatic, calling it “deeply wrong” and “God-awful that something like that would draw investment from civilized men and decent citizens.“

If I just saw your eyes roll, I get it — Munger’s comments sound a bit “backwoods tent revival”-ish on the surface…

But he’s not altogether wrong, and I’ll tell you why right now.

Although Robinhood took the insults as an opportunity to fuel the David vs. Goliath narrative, if you pull back the curtain, it’s not as black & white as all that.

Courtesy of Robinhood.com

In a retaliatory blog post, Robinhood essentially said Buffett and Munger are threatened by change, stating, “It is clear that the elites benefited from a stock market that kept many families sidelined from participating … driving a deep wedge between the haves and have-nots.”

They then threw extra shade at Buffett and Munger by using BRK.A stock as an example of how the commission-free trading and fractional shares Robinhood provides means “fans of the company can invest what they can afford and don’t need to amass what is a prohibitive sum” — a whopping $400K a share — “for most Americans.”

While it’s hard to argue that the notoriously high-priced BRK.A stock would be accessible to your Average Joes without Robinhood, what you might not know is this: Robinhood sells your order to the highest bidder.

They aren’t looking to get you into that stock at the best price. Your orders are basically a dinner bell on the proverbial trading floor.

And if I can’t exercise some control on my entry prices, it’s pretty difficult to build a reliable portfolio based on asymmetric returns.

Still, why I find the pious image that Robinhood’s trying to sell us laughable, one can’t ignore the collective power of the people.

The democratizing effect of apps like Robinhood have basically morphed retail traders into a giant whale themselves — like one of those massive schools of fish. Small on their own, but mighty as a group, as we saw with the “meme stock” rallies earlier this year.

That’s why I try to keep my finger on the pulse of the Robinhood army, because when I see a stock getting attention from this crew AND institutional traders like Buffett and Munger, it tells me there could be some powerful money flow going on.

It’s essentially dual-factor authentication and the basis of my trading, so while it’s fun to watch them argue sometimes, I certainly rely on both the billionaires and the plebeians to help me determine where to allocate capital.

And speaking of high-level trading… It’s time to check in on those fat cats and what they’re speculating on in the option pit today.

I Spy Impact Money

Here’s an unusually large option trade that crossed the tape this morning, pointing to potential institutional-level activity:

Unusual volume on ARKK – Courtesy of Trade-Alert

ARK Innovation ETF (NYSEARCA: ARKK), the exchange-traded fund run by famous manager Cathie Wood – whom we discuss regularly on the Money Morning Live show — has attracted notable attention today, as ARKK shares dip 3% to $113.39.

Most of the big blocks traded at the May 105- and 110-strike puts, and on the surface, it appears the trader may be putting on a short-term bull put spread to bet on a $110 floor for the shares. If so, they sold to open the 110-strike puts, and then added a layer of downside insurance by also buying to open the 105-strike puts.

Again, this “impact money” is just one side of the two-factor authentication trading technique I outlined this week, so if ARKK begins to trend on the retail side again, I’ll be taking note.

That’s it for today, Profit Takeover crew, but I’ll be dropping my next favorite trade idea tomorrow!

Talk to you soon,

Mark Sebastian

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