life. money. probability.
Kristi Ross: Productivity & Purpose CBD Cocktails & Edibles
luckbox of the Links
Entrepreneurs and cannabis companies are stepping up to calm us down
The 5F Formula for a Productive & Purposeful Life tastytrade co-CEO Kristi Ross is firing on all cylinders. She shares her formula. page 12
H E T X AN I E TY C E O N OMY Spotlight:
CBD & THC
Everywhere, 19 CBD’s But What Does the Science Say?
A pharmacologist’s critical look at the reality and hype of CBD marketing claims.
the CBD Market Will Keep Growing 22 Why
Retail chains are stocking up on ingestibles and topicals in anticipation of the phenomenon’s next phase.
Please! An Advocacy Group’s 26 Regulation, Perspective on CBD Unscrupulous merchants are making false claims and selling substandard products.
CBD Manufacturer Welcomes Oversight 28 This but With a Caveat
A Physician’s 30 CBD: Perspective
Microdoses of edibles are changing the way physicians deal with pain management.
Expectations 32 Low for this High Flyer
A contrarian take on Aurora Cannabis, a favorite marijuana stock among millennials
PHOTOGRAPH BY GARRETT ROODBERGEN
Regulators shouldn’t limit the public’s access to the THC-free cannabinoid, an entrepreneur says.
luckbox | august 2019
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Wouldn’t it be nice to trade futures that don’t look like futures?. All our products are simply priced, move in uniform tick sizes, and expire on the same day every month.
The Small Exchange’s application was submitted to the CFTC in December 2018. The CFTC generally reviews the application for 180 days; however, there are no guarantees that the Small Exchange will be approved by the CFTC within this timeframe or at all. The launch of the exchange is contingent upon approval. Please visit the website for full terms and conditions. Small Exchange is a trademark of Small Exchange, Inc. Copyright © 2019 Small Exchange, Inc. All rights reserved.
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editor-in-chief ed mckinley managing editor yesenia duran technical editor mike rechenthin features editor tom preston contributing editors vonetta logan Science experiment? No, it’s a bartender curating creative CBD cocktails .
actionable trading ideas
essential trading strategies
34 8 Favorite Fidget Toys
36 A New Take on the Highball
38 Strap on & Calm Down 39 La Dolce Vita: THC-Infused Sugar
ARTS & MEDIA
41 Book, Magazine & Podcast Reviews
43 Sleep More, Perform Better
LIGHT THIS CANDLE
49 CGC: High Volume Trade
50 The Top Cannabis Stocks
51 The Changing Tickers of Volatility
52 Medical Drama 54 Trading Around Uncertainty 56 Millennials are Overexposed to Cannabis
THE NORMAL DEVIATE
luckbox | august 2019
59 Stop Losses (Part 1) INTERMEDIATE
60 Stop Profits (Part 2) ADVANCED
62 Fine-Tuning Stop Losses (Part 3) 64 luckbox of the month
Chuck Miller’s Lucky
(Second) Hole in One
contributing art director cassie scroggins editorial director jeff joseph editorial assistants jessica christoffer, rocio villaseñor submit a story idea firstname.lastname@example.org comments & critiques email@example.com request contributor’s guidelines, submit press releases & editorial inquiries firstname.lastname@example.org advertising inquiries email@example.com subscriptions & service firstname.lastname@example.org media & business inquiries publisher: jeff joseph email@example.com
luckbox magazine is published at 19 n. sangamon, chicago, IL. 60607. editorial offices: 855.468.2789 printed at Lane Press
On the cover: Illustration by Peter Horvath
www.luckboxmagazine.com luckbox magazine @luckboxmag
44 The Weather Trade
46 Meet Tim Knight 47 1987 August Top in Stocks Déjà vu
luckbox magazine content is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities and futures can involve high risk and the loss of any funds invested. luckbox magazine, a brand of tastytrade, Inc., does not provide investment or financial advice or make investment recommendations through its content, financial programming or otherwise. The information provided in luckbox magazine may not be appropriate for all individuals, and is provided without respect to any individual’s financial sophistication, financial situation, investing time horizon or risk tolerance. luckbox magazine and tastytrade are not in the business of executing securities or futures transactions, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. luckbox magazine and tastytrade are not licensed financial advisers, registered investment advisers, or registered broker-dealers. Options, futures and futures options are not suitable for all investors. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any securities or futures transaction or trade. For simplicity, the examples and illustrations in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, endorsement, promotion or offer by tastytrade, or any of its subsidiaries, affiliates or assigns. While luckbox magazine and tastytrade believe that the information contained in luckbox magazine is reliable and make efforts to assure its accuracy, the publisher disclaims responsibility for opinions and representation of facts contained herein. Active investing is not easy, so be careful out there!
PHOTOGRAPH BY GARRETT ROODBERGEN
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ANXIETY CONSUMERISM How do you own disorder? Disorder Somewhere, between the sacred silence and sleep Disorder, disorder, disorder —Toxicity, 2001 Think back to the summer of 2001. Kind of dull. The box office was dominated by Shrek, Harry Potter, The Lord of the Rings and Monsters Inc. A gallon of gas cost $1.46. The fatal attacks of the “Summer of the Shark” was the most distressing trend. But then System of a Down released the song “Toxicity” on Sept. 4. There was something prescient about it. With lyrics like “Disorder, disorder, disorder,” it seems, in retrospect, to have presaged today’s anxiety economy and a certain event that occurred only a week later. The summer and the nation’s equanimity came to an abrupt end on Sep. 11 with when three jetliners crashed into the Pentagon and both towers of Manhattan’s World Trade Center. America suddenly became a much less placid place. In the weeks after the attacks, an alarming 49% of Americans reported their sense of safety and security had been shaken, and some 62% had difficulty sleeping, according to a study by the Institute of Social Research in Ann Arbor, Michigan. Some 57% felt compelled to take steps to protect themselves, according to a poll by the Harvard School of Public Health. Since 9/11, anxiety disorders have increased precipitously to become the most common mental illness in the U.S., affecting 40 million adults. Globally, the World Health Organization places the number at 300 million. And the disorder continues. Social media drives users crazy and threatens democracy. FOMO proliferates. Micro-
3 ways to send us your comments, criticisms, feedback & suggestions
luckbox | august 2019
thinking inside the luckbox
luckbox is dedicated to helping hard-working, proactive readers achieve results just as positive as the good fortune that befalls talentless, lazy luckboxes whose outlier outcomes outstrip their skills. How? it’s all here in the luckbox manifesto.
the luckbox soapbox 1 tune out the noise and
false prophets in the investment world
2 understanding probability is
the key to improving outcomes in the markets and in life
aggression rules the day. Partisan politics divides the nation, The border crisis festers. Opioids ravage the heartland. Student debt ruins young lives. Fake news shoves the truth aside. Climate change threatens to plunge the planet into chaos. Gender confusion, Russia collusion...ball of confusion. But chaos breeds opportunity. The free-market vendors offering highpriced antidotes to anxiety include therapists, app developers, wellness gurus, physicians, entrepreneurs, charlatans, corporations and opportunists of every stripe. Check out this issue of luckbox for a unique take on the Anxiety Economy. Capitalism encourages Americans to try to buy their way out of the problem, but it’s really not that simple. Instead, readers are invited to join luckbox in an exploration of CBD. It’s the cannabis derivative that’s suddenly become the basis for a multi-billion dollar industry that informed investors should no longer ignore. Keep Calm and Trade On. Tom Preston features editor
Jeff Joseph editorial director
mail firstname.lastname@example.org E Visit luckboxmagazine.com/survey Scan THYNG on the next page and take our survey
3 stock-picking is a low-
probability investment strategy
4 hot investment themes,
sectors and stocks matter only because they tend to produce greater volatility
5 greater volatility =
6 options are the best vehicle
to manage market risk and exploit market volatility
7 whatever you’re doing
with your money now— you can do better
8 luckbox can help you do
9 learn your options—luck
smiles upon the prepared
10 so, get off your ath—
let’s do some math!
don’t rely on luck, get luckbox
Higher Anxiety When luckbox decided to zero in on the ever-expanding treatment economy that addresses America’s No. 1 mental health disorder, the promotional image of for the 1977 “psycho-comedy” High Anxiety, came to mind as a cover idea. Mel Brooks produced, directed and starred in the comedy classic. He plays a psychiatrist with a severe fear of heights who moves to the Bay Area to take over a psychiatric hospital after its administrator mysteriously disappears. The film spoofs Alfred Hitchcock’s thrillers and was dedicated to Hitchcock, who worked with Brooks on the screenplay. The movie poster for High Anxiety, like the movie itself, parodied Hitchcock’s Vertigo. luckbox engaged new media artist and illustrator Peter Horvath to provide his spin on the iconic image for the August cover.
Open Outcry Thank you and the staff of the magazine for the hard work. I enjoyed Vonetta Logan’s “IPOs Aren’t For Real” (July) article. The light-hearted description of some of these newer IPOs makes you wonder who is going long those stocks. I found the answer in the luckbox of the month rip on Zillow in the very last paragraph of this issue…”the State of Wisconsin Investment Board doubled its holdings in Zillow to 1.82 Million shares”. Ha! I don’t play any video games; it’s a waste of time, But reading the esports stories, I was amazed by the revenue numbers and learning that “surgeons who play video games are more skilled” made me question if I am missing some needed skills in this new world. Finally, I like to learn more about the tastytrade stars. Thank you and the magazine staff for the hard work. —Mohammed Alhareb, Salt Lake City, UT
luckbox regularly calls upon tastytrade personalities and their research team to provide readers with actionable articles. For this issue, Vonetta Logan investigated CBD-infused cocktails. luckbox didn’t have to twist her arm. Also, tastytrade’s co-CEO, Kristi Ross, shares her winning formula for improving professional productivity and achieving personal fulfillment (see p. 12).
You’d think my generation would recognize the potential for esports a lot sooner, but maybe we just weren’t aware. luckbox has brought together an amazing array of data, along with the humor (Thanks Elan!) and financial
content to make it more than just your average financial magazine. Oh, and wow, Tony Battista’s desk (Trader, June issue) looks like mine some days. Love it! —Sascha Illyvich, Decatur, GA I am loving the luckbox so far. Each issue covering different topics is great. I really loved this latest July issue on the esports, especially, What Zelda Teaches About Trading. I found it interesting how you compared the early days of gaming preinternet where you had to figure out after endless trial and error to get through a game as opposed to nowadays where you can start a game get stuck and immediately go online and grab a solution, and how that can compare to putting more time into trading. I am looking forward to future issues. —William Badillo, Bloomfield, NJ
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32% of adults felt more anxious in 2019 than in 2018 7% of adults use a mental health app to support their mental health
“The first time I ever tried CBD was to help soothe my anxiety. I was fed up with taking various pills to try and make me ‘better.’ It wasn’t how I wanted to live my life anymore. So I gave CBD oil a try. It immediately alleviated 90% of my pain. The benefits of CBD oil are unlike anything any pill or medication can do.” Tom Hanks
“CBD helps with pain, stress and anxiety. It has all the benefits of marijuana without the high.” Jennifer Aniston
“The illegality of cannabis is outrageous, an impediment to full utilization of a drug which helps produce the serenity and insight, sensitivity and fellowship so desperately needed in this increasingly mad and dangerous world.” Carl Sagan
American Psychiatric Association Public Opinion Poll, May 2019
“Today was a historic day in the fight to end federal marijuana criminalization. Members of both political parties demonstrated a desire to reform our nation’s failed policy of prohibition and the only disagreement was HOW, not IF. Clearly, the Schedule 1 status of marijuana is intellectually dishonest and has been scientifically debunked. The prospect of maintaining marijuana in the Controlled Substances Act is sheer lunacy in the 21st century.” Justin Strekal, political director for the National Organization for the Reform of Marijuana Laws, following a July 10 hearing before the House Judiciary Subcommittee on Crime, Terrorism and Homeland Security on the subject of “Marijuana Laws in America: Racial Justice and the Need for Reform”
luckbox | august 2019
“The public is up against a narrative that is at war with science. The subversion of truth and science and what is going on in North America [is a source of] great concern and reason to pause and do risk assessments on these drugs and analyze the influence of the billionaires in the industry that have influenced public sentiment and dictated a very deceitful campaign.” Pamela McColl, advocate for children’s issues and director of Canada’s Smart Approaches to Marijuana, at a U.S. Food and Drug Administration hearing on CBD
Despite a growing American economy, adults in the United States are more worried, stressed and angry. The percentage of Americans who experienced stress was 20 points higher than the global average. Psychology Today, May 2019
august 2019 | luckbox
FAKE FINANCIAL NEWS
CBD: Placebo or Panacea?
t’s been a while since a trend has whipped the zeitgeist into more of a frenzy than CBD has managed. Keto came close, there was that whole grapefruit diet fad and there were the “fat-free” potato chips whose only side effect was explosive diarrhea. If there were a shortcut to wellness, or a onesize-fits-all pill, Americans would crave it. Some still miss Fen-Phen. Heart attacks, schmart attacks! Look at how small my thighs are! It was hard to get a good response to a poll at the luckbox offices about who’s tried CBD. “What are you, a narc?” “If you’re a cop you have to tell me…” “I smoked at Lilith Fair once, does that count?” OK, so let’s look at the stats. “The Brightfield Group, a cannabis research firm, estimates that hemp-derived CBD sales could hit $22 billion by 2022.” This is from The Complete Guide to CBD, which is on the rack at grocery stores. See? Zeitgeist. It was next to US Weekly. But what, exactly, is CBD? CBD, or cannabidiol, is simply one of about a hundred molecules found in hemp and cannabis plants. CBD is the nerdy “nonintoxicating” little bro molecule to THC’s cooler older bro molecule that’s known for its “high.” Anecdotally, CBD can help with almost every ailment from insomnia to chronic pain to anxiety. “So far, messages of CBD’s purported health benefits come from people trying to sell CBD products—not from scientists—and a gaping chasm separates the surging CBD
luckbox | august 2019
market and the scientific evidence backing it,” says Margaret Haney, a neurobiologist who directs the Marijuana Research Laboratory at Columbia University. Illinois, home to luckbox (we tried to set up in the Grand Cayman for “tax purposes” but…), has become the 11th state to legalize cannabis for medical and recreational use by adults. And a recent survey shows public sentiment has shifted, with as many as 60% of adults favoring legalization of cannabis at the federal level. So luckbox reached out to a local physician, Dr. Rahul Khare, who runs Innovative Wellness in Chicago’s Lincoln Park neighborhood, to get his take on CBD and its benefits and myths. (See pg. 30 for more from Khare.) Khare said in an interview that for decades doctors were trained to steer patients away from marijuana. “You need to get off. It’s illegal. There are no health benefits,” was the standard litany, he recalls. But that changed. “All of a sudden, three-and-a-half years ago, it’s like, ‘Oh, it’s legal (medically in Illinois),
It used to be ibuprofen and Tylenol. Now there’s something stronger— there’s cannabis
and it has all these health benefits,’ and the doctors are like, ‘Wait, what?’” Khare attributes the disconnect to the lack of a network that would provide information to physicians. “We just haven’t gotten the training,” he says. “There’s not a beautiful drug rep coming into my office. That’s how physicians learn. We’re marketed to. It’s nuts.” Anyone know what a buxom drug rep bearing baked goods could “educate” physicians about? Opioids. “We have an issue with opiate over-prescription...so it’s time to acknowledge that and change our prescribing habits,” Khare maintains. “Now we have high-CBD-content cannabis. We have alternatives, which we really haven’t had for a long time. It used to be ibuprofen and Tylenol. Now there’s something stronger—there’s cannabis. It’s changing the way we’re dealing with pain management.” Marijuana is considered a Schedule 1 drug, which makes it difficult to conduct clinical research into its ability to help patients. According to an article in the March edition of Science News, “Scientists still don’t know all of the targets CBD hits in the human body, nor what effects it may have—if any. Much of the existing research was done with cells in the lab or in lab animals, with results that don’t necessarily translate to people.” Khare pushes back on this assertion and emphasizes that mankind has been using cannabis for thousands of years. Even if someone is experimenting with it to cure her own issues the risk of side effects is low.
PHOTOGRAPH: REUTERS/MIKE SEGAR
By Vonetta Logan
An attendee takes samples of CBD candies on May 30 at The Cannabis World Congress & Business Exposition trade show in New York.
He says he sees the best results in his patients when he uses both CBD and small amounts of tetrahydrocannabinol (THC). “They work synergistically. We call it the entourage effect,” he notes. “With the entourage effect, you’d rather get the whole plant rather than just the CBD isolate.” Khare has seen firsthand the antiinflammatory benefits of CBD in his own practice. He says treating chronic pain definitely ranks as the No. 1 benefit. “CBD is anti-inflammatory, but not like the way that ibuprofen or prednisone or some of these steroids are,” he says. “Taken over two weeks consistently it will reduce inflammation. It’s very subtle, but it works.” Meanwhile, others advise a cautious approach. As Anna Symonds, director of
CBD Certified, says, “Currently, the Food and Drug Administration is not allowing any CBD product manufacturers to make medical claims.” But whatever the experts think, CBD mania is taking hold. Everyone from dogs to grandmas is singing its praises. According to The Complete Guide to CBD, “Sales of CBDinfused gummy candies increased 925% between 2017 and 2018, while the market for CBD-loaded chocolates shot up by 530%.” With 60% of Americans experiencing chronic problems with falling asleep, CBD may come to the rescue again, Khare continues. “I tell my patients all the time—if your issue is not being able to fall asleep because of racing thoughts, then two or three puffs of a pen or smoking it or a tincture of cannabis with THC and CBD will get you to sleep.” Take two puffs and call me in the morning? Best. Doctor. Ever. But, “because of lax oversight, there’s no telling what’s inside many of those tinctures, oils, rubs and foods for sale online and in stores,” according to Science News. So where does this leave Americans? Fake Financial News debunks junk. There aren’t enough studies and data to support the use of CBD for pain, sleep or anxiety because for so long no one has been able to study it. And, how does anyone know the CBD online isn’t just shredded Chinese newspapers? Conversely, millions of people are already happily using a broad spectrum of CBD products for pain, sleep and anxiety, including some here at luckbox. So, brave reader, go gently into that CBD night with tips from Dr. Khare. Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan
DR. KHARE’S CBD TIPS Read the label! Look for products that use the whole hemp plant and not just the synthesized CBD molecule. Make sure it’s lab tested. Look it up on the company’s website. By law (2018 Farm Bill) CBD products must contain less than 0.3% of THC. But if there’s a lab test, that means they’re taking the time to batch the product and provide additional details and information. Don’t be a cheapskate. CBD, like sushi, shouldn’t be purchased at a gas station or convenience store. Pure CBD costs more than a compound with a lot of other additives mixed in.
A PERSONAL CBD JOURNEY In April 2018, it sounded like fun to learn to ride my motorcycle off-road. It was! I handled hill climbs and single-track tight turns like a motocross champ until my motorcycle took an unscheduled “dirt nap” on my leg. It shattered my tibia and fibula, and I got 12 screws and a steel plate in my leg as a souvenir. I was sent home with a goodie bag of Norco (HydrocodoneAcetaminophen), which is tylenol and Hydrocodone—for when you really wanna party. I started rehab and physical therapy but wasn’t progressing and was still in a lot of pain. Turns out, I had broken three of the hardware screws in my leg. Snapped ‘em real good. I was being good, I swear! So back to surgery I went in September 2018 and home again with another bag of take-home candy, this time norcos and morphine. My orthopedic surgeon took bone from my hip to implant into my leg for additional support. I donated bone to myself! I don’t need no man! But the bone graft site from my hip caused terrible post-op nerve pain. Your hip hates it when they take bone from it. But I wanted to get off the drugs, so I tried physical therapy. Then my dad told me to try CBD. I have been taking it since September and have seen a huge reduction in pain. I use 30 mg of CBD as well as a CBD-based balm, and when I can get it legally, I use 5mg to 10mg of THC. My quality of life is better because I can continue to do my strengthening exercises, and I sleep like a champ! And as of April I’m back on my motorcycle. What works for me won’t work for everyone, but I’m happy to be off opiates. —Vonetta Logan
Know Dosing. Even though one can’t really overdose on CBD, start low and go slow. Start with half a dropper twice a day and then up-titrate.
august 2019 | luckbox
Ross speaks with authority on the subject. She’s earned recognition in the business community, compiled a distinguished record of philanthropic service, and conducted more than 500 interviews with entrepreneurs and CEOs on her daily Bootstrapping in America show on the tastytrade network. Combining her own extensive personal experience with what she’s learned from highlevel executives and budding entrepreneurs, Ross has worked out a formal approach to balancing the most important aspects of a busy life. She calls her formula the 5Fs
5F Kristi Ross’
Formula for a Productive & Purposeful Life By Kristi Ross
PHOTOGRAPH: GARRETT ROODBERGEN
eventy-two percent of entrepreneurs say they’re feeling anxious. To help those alphatypes cope, luckbox sought the advice of Kristi Ross, co-CEO and president of tastytrade, the Chicago-based financial media company that aids DIY investors.
Kristi’s Fitness & Food Resources
Fitness & food
Physical and mental fitness intertwine to foster wellness and enhance performance. The successful formula for running a marathon, for example, might be something like 90% mental effort and 10% physical effort. Don’t underestimate the importance of that mental effort. Everything in life arises with our thoughts. For example, wake up expecting a bad day and that prophecy will almost certainly come true. Avoid that negative mindset and redirect distracting thoughts back to the positive side. Of course, attitude alone doesn’t clear the way for success in life or in business. Entrepreneurs often fail repeatedly before they achieve their goals. That’s why they should summon every bit of drive and ambition they can muster to get back up and keep trying. Besides, the lessons from a bad day reveal how to improve the next day. But it’s difficult to apply those positive mental attitudes unless they’re backed with physical fitness. A strong body supports a sharp mind and positive mindset. Train for that marathon, because conditioning builds the foundation needed to run that race. In a race or in life, physicality requires carving out time for a workout routine. Think of it as forming a series of good habits. With enough repetition, good habits become mechanical. Do something every day for a month and it can become an unbreakable habit. Still, the task of forming big, important habits can seem daunting. That’s why it helps to break big goals down into smaller doable pieces and accomplish
something small but important every day. Commit to safety nets like never missing the daily workout two days in a row. Reinforce commitment to a daily workout habit by measuring the progress that’s occurring. An Apple Watch, for example, tracks activity automatically, and users can then manually enter specific activities into the Lose It! app. It’s gratifying to see the improvement quantified. Celebrating daily wins can help, too. Stick to a routine. Exercise at the same time every day. Start with just a few minutes of working out and build up to a longer routine. Reduce friction by laying out workout clothes the night before or placing running shoes in a spot where they’re a visual reminder to work out. Once the habit of doing the same thing at the same time is formed, vary the workout before boredom can set in. Some like to change their personal fitness challenge every month to keep it fresh. It keeps them on track to know that there’s a new goal to reach each month, one day at a time. There’s no denying the effort’s worth it. Studies indicate the benefits of working out don’t end with the obvious increases in strength and stamina. The evidence is in the numbers and the chemicals: exercise increases levels of dopamine, serotonin and endorphins. Those natural substances have positive effects on everyday performance. Health and fitness form the foundation for everything. So, that 90% mental aspect of running that marathon was just made a little easier by creating a strong physical base.
30 Ways to Reboot Your Body: A Complete User Manual for Getting the Most Out of the Human Body By Ben Greenfield Kindle format: $2.99
Exercise also results in deeper sleep, which means quicker muscle repair, clearer mental processing, better decision-making and overall good health. Quality of sleep matters as much as quantity. Whoop, a wearable device designed to improve training, sleep and lifestyle choices, measures sleep efficiency and recovery in real time. It can feel like having a sleep coach. Researching the benefits of sleep, tracking one’s own sleep and making healthy adjustments can fine-tune one’s energy and focus. Eating right complements working out, so put down the bag of Doritos and walk away. Ha! If it were that easy, everyone would be at the ideal weight. Instead, pack snacks for specific times of day. Sip black coffee, green tea or lemon-infused water throughout the day in lieu of sugary, chemicalladen soft drinks. Focus on fruits, vegetables and meat instead of overly processed foods. Protein wards off hunger and requires fatburning energy to digest. Avoid late-night snacks. Find a substitute mini workout routine on the workout and meal planning 8fit app. Weighing in at the same time every day fosters accountability. Make it a habit. Don’t give up everything that’s fattening, but eat calorie-laden foods in moderation. Settle for a bite of cake, or eat the burger without the bun. Small servings can satisfy the craving. If they don’t, just grab a glass of water and wait a few minutes before going back for more. Measurement encourages better eating habits. Monitor weight, macronutrients and caloric intake with the Lose It! app.
The Whoop strap fits around the wrist and measures heart rate 24/7, calibrating a baseline, making training recommendations, and monitoring recovery, strain and sleep—sixmonth membership requires $180 to begin and $30 a month. whoop.com
FACTOR75 delivers chef-prepared, high-protein meals to subscribers’ front doors. factor75.com 8fit app combines prepared meals with weekly workout plans customized to individual fitness level and rooted in high-intensity interval training, while also tracking meals and activities outside the plan—skeptics can try it free for 14 days. 8fit.com Lose It! app users receive a personal daily calorie budget and weight-loss plan, food and exercise tracking, connection with other trackers and apps, and access to a community for inspiration—premium version costs $3.33 monthly. loseit.com
august 2019 | luckbox
Kristi Ross, co-CEO and president of tastytrade—an online financial network founded to make finance fun and actionable—became a chief financial officer at the age of 25 and started her own business at age 28. Since then, she’s helped mastermind more than 30 mergers, acquisitions, capital raises and company startups. Yet she’s still found the time to raise three daughters, care for two dogs, compete with her equally Type-A husband, run three marathons, track her nutrition and fitness, give back to the community through philanthropic work, and earn an incredible array of honors. In 2014, Ross, her co-CEO Tom Sosnoff and their team founded Dough, a visual front-end trading technology platform. A couple of years later, the team built out the back-end to create a customer-oriented brokerage firm. They expanded their offering to help control the customer experience and deliver what self-directed investors need. The team shelved the name Dough for later use and rebranded. They also brought in veteran trader and serial entrepreneur Scott Sheridan to register and help run the new venture. The result was an online brokerage firm called tastyworks. It was launched in January 2017, and Ross serves as chairman of the board. The tastytrade and tastyworks combination collectively help do-it-yourself
Ernst & Young Entrepreneur of the Year Award
luckbox | august 2019
The Illinois Technology Association CityLIGHTS Prominent Woman in Tech
investors engage with their finances. Now, the team is resurrecting the name Dough to fulfill a similar mission for beginner investors. They brought in Victor Jones to lead Dough and bring a fresh perspective on finance and risk-taking. Dough will use the latest trading technology and actionable content to help customers new to the markets. The new Dough team is delivering all of that to mobile phones. As part of that collective mission, Ross co-hosts the daily show Bootstrapping in America on the tastytrade online streaming network, where she interviews entrepreneurs, the ultimate DIY’ers, who share their startup experiences. Before that, Ross served as CFO of thinkorswim Group, as a private company that TD Ameritrade later bought for $750 million in 2009. Before thinkorswim, she worked as CFO of Automated Trading Desk Specialists, a stock specialist firm on the Chicago Stock Exchange. Ross has served on the boards of companies engaged in banking, trading, technology, restaurants, media, exchanges, SAAS technology and fintech. She’s performed philanthropic work with ChicagoNEXT Fintech Council; Meet Kristi Ross, P33 Technology Initiative; Chicago’s tastytrade coInnovation Hub CEC/1871 and the CEO & president Midtown Educational Foundation.
The James W. Haugh Award for Entrepreneurship and Ethics in Business
Innovate Finance’s Global Women in Fintech Powerlist
Chicago Innovation Hall of Fame
Crain’s Chicago Business Tech 50
The Techweek 100 list
PHOTOGRAPH: GARRETT ROODBERGEN
Family, friends & fun Making time for fun and laughter isn’t only healthy, it’s a great stress reliever. Some would say family time rivals working out and good nutrition as a pathway to good health. And few would deny that hanging out with the family or friends is more fun than spending time at the gym. In a busy world, the amount of time spent with friends and family isn’t always easy to control, but everyone has the power to improve the quality of that time. Make sure to set aside one-on-one-time for each child in the family, pursuing fun or philanthropy that fits their strengths and interests. Don’t forget date night. But it doesn’t have to include dinner and a movie. It could be going for a bike ride or a run. Walk to dinner. Combining fitness-focused activities with time spent with a partner can make the date feel productive and fun. Combining a few of the 5Fs into the same activity can create stronger interwoven bonds and overall satisfaction levels. Feeling connected to others by developing loving, deep-rooted relationships can bring happiness. Investing in close relationships, whether it’s with a spouse, friend, partner, kids, parents or siblings can even boost longevity, according to a Harvard relationship study (see sidebar on page 16).
Loving Each Other: The Challenge of Human Relationships by Leo F. Buscaglia
Management requires measurement, so it pays to know the numbers underlying personal finance. That can include the seemingly mundane but actually vital habit of keeping a formal budget, which can solve the mystery of where all that money went. Track the inflows, outflows, metrics and measurements. What percentage goes for housing versus core necessities, travel and entertainment, charitable causes and pure wants? Are those good choices? Are the levels of spending appropriate in each category? The budget shows precisely where the budgeter fell off the financial wagon and what needs to change to get back on. Without measurement, all that’s left is gut feel. Live by a personal budget even if it seems unnecessary or if there’s money to spare. Make it a goal to be able to recite where the money was spent and how it was spent. Once a personal budget is established, it may be time to consider investing. Wading into the markets makes sense at any age or level of experience. Start small. Don’t risk everything. Learn risk-taking in bite-sized installments. Demystify the market by remembering that literally no one knows what the market will do. No one knows what any one stock will do. Too many factors affect a stock price and the overall market. Next, it’s time to get more strategic with investing. Try spending 10 minutes a day building knowledge of trading—instead of devoting 40 minutes a day to Facebook, like the typical American. There are free user-
friendly educational resources for traders at the Learn Center at tastytrade. Time spent trading can include learning terminology, becoming familiar with products and trying new strategies. As with fitness, devote a little time each day or a few times a week to investing. Form good habits and follow a logical, mechanical approach. Spend time each day exploring new trades, checking current positions and deciding whether to close some out. It’s a daily exercise. Stay small, so that a single position doesn’t ruin everything. Don’t expect homeruns but consistently hit singles. It takes discipline. Those who are highly competitive appreciate the daily challenge. It keeps one “fit” and attuned to the pulse of the market. Checking investments daily doesn’t consume much time at all. If the concern is that there isn’t time to watch the markets all day, use options to trade strategically. Take some risk but leave some breathing room. A good example would be selling a wide strangle that has an 80% probability of profit. It’s a good go-to strategy that keeps an investor in the market, allows for some risk and return but doesn’t consume the whole day. Or try putting on a defined risk trade like an iron condor or covered call. The Learn Center at tastytrade teaches those strategies. Take the time to learn something new about the markets and trading every day. It makes it more fun.
august 2019 | luckbox
Beyond family and friends, take the time to give back to the community in a way that’s personally meaningful. That way, volunteering or contributing funds feels good and can become a habit. But sticking to a routine still takes a conscious effort, so set aside time for charitable work weekly or monthly. In one example, a family without a dog could make a weekly pilgrimage to an animal shelter to walk some of the canines. That way, the kids connect with animals, and the dogs get the attention they crave and the exercise they need, while the shelter benefits from help with the chores. Keeping the trips consistent also teaches children responsibility. All of this can happen without the danger of a child losing interest in daily petrelated chores and leaving a parent
Lots of Knots: EveryHandCounts—Syd Can Do and So Can You Written by Kristi Ross and illustrated by Paul Dolan. Lots of Knots teaches kids their little hands can make a big difference. Proceeds from sales of the book go to charities.
luckbox | august 2019
to take up the slack. In an example of a monthly philanthropic chore, family members could work together when they volunteer for organizations like those that provide homeless shelters with blankets. Folding, storing and transporting the blankets teaches children to get up early, take on responsibility and organize their activities. Community engagement and philanthropy, along with developing close relationships with family and friends, has been cited by a prominent Harvard University study as a critical determinant of personal health and happiness. Other types of philanthropy occur just once. Take two examples from this writer’s life. My young daughter cut her long hair to support a charity, inspiring me to write a book to share the experience with others. It’s called Lots of Knots. In another example, I teamed up with my sister and my niece for a two-day walk to raise funds to combat breast cancer. At the time of the walk I was 44—the same age my mother was when breast cancer claimed her life. It’s really about finding something that’s meaningful. When there’s a connection or passion, there’s greater enjoyment.
Harvard Study on Relationships In 1938, scientists began tracking the health of 268 Harvard sophomores. With 80 years of data, the seminal Harvard Study of Adult Development ranks among the longest scientific looks at adult life. The authors of the study cited close relationships as the most prominent indicators of a long and happy life — rating them more important than financial achievement or professional recognition. Flourishing social and community engagement via family, friends and philanthropy were found to shield people from anxiety and delay mental and physical decline. “It wasn’t middle-age cholesterol levels that predicted how they were going to grow old...it was how satisfied they were in their relationships with family, friends and community,” notes Harvard Medical School professor Robert Waldinger, the study’s director. Waldinger’s TED talk, What Makes a Good Life? Lessons From the Longest Study on Happiness has been viewed more than 13 million times. “Those who kept warm relationships got to live longer and happier lives,” Waldinger says in the talk, and he also warns of the lethal nature of feeling isolated: “Loneliness kills. It is as powerful as smoking or alcoholism.”
Either consciously or unwittingly, every person occupies the driver’s seat of his or her life. Each has the power to choose life’s focus—the purpose they set out to accomplish. Entrepreneurs often define their focus as their company’s mission. It’s part of who they are, what they believe and what stirs their passion. Many embrace life-long learning and insist upon enjoying the journey. Most people want to spend their days doing what they love and loving what they do. That way it doesn’t feel like work. Learn from the hardearned wisdom of others. Apps like Blinkist (blinkist.com) serve up the key ideas from the world’s greatest books on motivation, business and productivity in both text and audio formats. It’s not easy, but everyone can lead a balanced, happy, meaningful life, even if they spend the preponderance of their hours at work. It’s about doing what feeds their passion, consciously creating joy and banishing anxiety. It’s about building a strong foundation by staying healthy in body and in mindset. It’s about learning something new every day and embracing challenges. It’s about putting fears aside, seizing opportunities and taking risks. My motto: Opportunity is all around—in investing, in business and in life. Grab it!
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H E T X AN I E TY C E O N OMY Booming demand for anxiety-reducing devices, apps, programs, cannabis and pharmaceuticals is giving birth to a new economy
luckbox | august 2019
Tens of millions of fidget spinners, fidget cubes and weighted blankets haven’t been sufficient to reduce the need for THC and CBD in the emerging anxiety economy. THC (Tetrahydrocannabinol) works as an analgesic but also produces a psychoactive side effect known affectionately as a “high.” CBD (cannabidiol) possesses anti-anxiety properties but only induces calm, not euphoria. In the last few years, millions of Americans suffering from anxiety, depression, insomnia and joint pain have embraced of Americans are CBD. According to affected by anxiety Brightfield Group, 41% of each year and nearly one-third of CBD users partake of it daily Americans are affected and an astounding 43% of at some point in their lifetimes. CBD users choose cannabis Source: Anxiety and Depression Association of America and the instead of over-the-counter National Institute of Mental Health or physician-prescribed pharmaceuticals. Despite the enthusiastic adoption of CBD, serious questions remain unanswered with respect to regulatory oversight, consumer protection, dosage and efficacy. To help sort the variables, luckbox called on physicians, consumer advocates, manufacturers and retailers. At stake for investors is a CBD market estimated at $5 billion this year and expected to reach $24 billion by 2023.
In this section 22
CBD is just getting started
Marketing hype and false claims
Regulatory oversight ahead?
A physician advocates microdoses
CBD’S EVERYWHERE, BUT WHAT DOES THE SCIENCE SAY? C annabidiol (CBD) is finding a home these days in everything from skin creams and ingestibles to craft cocktails and pet products. CBD stores are popping up on street corners and in malls, and independent pharmacies and major drugstore chains are selling products laced with CBD. But what’s the underlying story? Does science back up the hype or is this another here-today-gonetomorrow health fad? luckbox enlisted pharmacologist Mike James, Ph.D., to separate fact from fiction.
Aurora Cannabis contrarians
august 2019 | luckbox
TH E E A NXOI TY E C N OMY High or not? Cannabidiol (CBD) and tetrahydrocannabinol (THC) are both components of hemp and marijuana. THC gets users high, while most consider CBD merely relaxing. To say the least, CBD has recently attracted the attention of the popular press and the scientific community. Marijuana and hemp come from different strains of the plant Cannabis sativa. Growers have bred marijuana strains for higher levels of THC, ranging from 25% to 40%. Hemp strains have been selected for higher levels of CBD and very low levels of THC, less than 0.3 % by federal law. CBD’s uncertain potential Users and entrepreneurs are touting CBD as a cure-all for a lengthy list of complaints and ailments. In two recent surveys, 38% to 55% of CBD users reported they use it for relaxation or to promote good health. CBD users in the studies cited at 15 medical conditions they attempt to treat with CBD. The most common health problems cited in the surveys were pain, anxiety, depression and insomnia. As with many dietary supplements, advocates of using CBD to treat those conditions generally base their assumptions on animal studies, case reports or small clinical studies. Let’s look at what’s known about the usefulness of CBD for treating the top conditions. Epilepsy A prescription-only, oral form of CBD called Epidiolex has earned the approval of the U.S. Food and Drug Administration (FDA) for two rare types of epilepsy (Lennox-Gastaut syndrome and Dravet syndrome). FDA approval requires proof of effectiveness in well-designed clinical trials. Hardly anyone disputes this use of CBD. Anxiety It’s effectiveness is not so certain with anxiety.
The positive effects of CBD in animal models of anxiety make a strong case for studying CBD in clinical trials, but the results in human trials have been mixed. Whether animal models truly represent human anxiety remains questionable. It’s also unclear from animal studies if long-term dosing maintains the positive effects of CBD on anxiety. Clinical studies provide directly applicable data but researchers conduct many of the CBD clinical trials on anxiety disorders with only small numbers of patients. Results from small studies are more difficult to apply to the general population because of a lack of statistical power. In other words, a small study may exaggerate or underestimate the effects of CBD. In addition, several clinical studies on the effectiveness of CBD for anxiety used THC as the anxiety-inducing stimulus. THC-induced anxiety may not provide a good representation of anxiety produced under other conditions. Most of the studies were single-dose studies and would be of limited value in assessing long-term effectiveness. Pain CBD and the combination of CBD and THC reduce pain in studies of animals, but evidence of the effectiveness of CBD alone on pain in humans is lacking. However, a study of a combination of THC and CBD for treatment of pain caused by nerve damage induced by cancer chemotherapy yielded positive results. But combining CBD and THC without a comparison to each agent alone makes it difficult to interpret those results. A comparison with the individual components would have made it possible to determine whether the effects were due to THC or CBD or unique to the combination of the two. Depression Evidence that CBD’s useful for treating depression seems to come solely from pre-clinical
Caveat Emptor Nearly seven of 10 CBD products don’t contain the amount of marijuana extract promised on the label, according to a 2017 study led by the University of Pennsylvania School of Medicine’s Marcel Bonn-Miller. Nearly 43% of the products studied contained too little CBD, 26% contained too much and about 20% contained psychoactive THC, which is still illegal in some states.
luckbox | august 2019
(animal) data. A 2017 review of using CBD in psychiatry found no clinical evidence that it alleviated depression. Insomnia A single small study of 15 subjects on the effects of CBD on insomnia showed that at the highest dose tested,160 mg, subjects reported that they slept longer but did not find it easier to go to sleep. Acne and inflammatory skin conditions Some evidence in human skin cells suggests CBD may be useful in treating acne. But the effectiveness of CBD against acne hasn’t been determined in clinical trials. A small retrospective study showed a subjective improvement in acne and psoriasis scarring. But the topical ointment in that study included several natural ingredients besides CBD and did not include a control group using ointment without CBD. Those factors make it difficult to attribute the observed effects to CBD. Other uses A small clinical trial suggested CBD may be useful in treatment of opioid-seeking behavior in heroin addicts. Other studies have suggested CBD may ease nicotine and marijuana dependence. Clinical trials in larger populations may confirm those preliminary studies. Also, a small, single-dose study showed a decrease in resting blood pressure and decreases in the elevation of blood pressure in response to exercise and cold stress. Further studies may determine the significance of this effect. CBD’s downside For the prescription form of oral CBD, the most common side effects include drowsiness, decreased appetite, diarrhea and an increase in transaminase levels in the blood. Transaminases are liver enzymes normally found only in low levels. Elevated transaminase can indicate liver damage. So anyone with liver disease should consult a physician before using CBD. Other side effects have included general weakness, trouble sleeping and infections. Because of the effects of CBD on alertness, caution should be used when driving or performing other tasks requiring concentration. In addition, the way oral CBD is broken down in the liver can cause it to interact with a number of drugs. So check with a pharmacist before taking CBD. Another note of caution: CBD may harm a developing fetus. No data
64 million Americans have tried CBD in the past two years One in seven uses it daily 63% claim to find it effective Source: Consumer Reports
is available regarding the effects in pregnant women, so see a physician before using CBD during pregnancy or lactation. CBD abuse? The Drug Enforcement Administration (DEA) ranks drugs according to their potential for abuse and places them on Schedules I-V. Schedule I controlled substances have high potential for abuse and no recognized medical use. Schedule II have high potential for abuse but have a recognized medical use. Schedules III, IV and V have recognized medical uses with less potential abuse as the designation increases. So where does CBD fall in the DEA rankings? The oral prescription-only form of CBD (Epidiolex) is a Schedule V controlled substance. Still, in tests, CBD did not produce drug-seeking behavior in animals or subjective effects similar to THC in humans. Tests also produced no evidence of dependence in humans who took CBD for 28 days. Taking CBD CBD comes as an oil, in capsules, as a sublingual tincture (an alcohol-based solution dropped under the tongue), cartridges for vaping pens, edibles and topical creams. Making definitive statements about dosing is difficult for two reasons: The amount of CBD in these products varies greatly, and clinical data for most of the proposed uses of CBD remains scarce. In addition, data is derived from studies of only one- or two-dose levels, so complete dosing information isn’t available. When it comes to dietary supplements and medications, more doesn’t equal better. Users should choose the lowest effective dose to decrease the chances of unwanted side effects. Deciding on CBD Except for treating two specific, rare forms of
epilepsy in children, the clinical evidence for using CBD remains sketchy. Given the potential side effects and drug interactions, it’s difficult to justify using it. Pharmacokinetic studies have shown people can absorb a significant amount of CBD into the bloodstream after application to the skin, so even topical application of CBD products may have adverse effects. CBD products also have uncertain legal status. The Hemp Farming Act of 2018 legalized the growing of hemp in the United States. The Hemp Farming Act was passed as part of the larger farm bill The Agricultural Improvement Act of 2018. However, in April 2018, The Ninth District Court of Appeals ruled that CBD is a Schedule I controlled substance under federal law (meaning it has abuse potential and no recognized medical use). Schedule I substances are regulated by the DEA and the FDA. CBD is legal in states that have legalized medicinal or recreational marijuana. However, the Health Department of the State of Hawaii issued a statement in May that says selling CBD products to anyone without a medical marijuana card is illegal. The FDA and some states are working to develop regulations governing sales and safety monitoring for CBD products. CBD in urine tests Urine tests for marijuana detect a metabolite (breakdown product) of THC. The most commonly used tests should not detect CBD. In addition, all CBD products must contain less than 0.1% THC, so CBD products that comply with regulations should not produce positive results on urine drug tests for marijuana. CBD hype? Is the clamor over CBD overblown? The short answer is “no.” CBD is popping up everywhere in almost anything. But the hype for CBD for uses other than epilepsy seems premature. Other claims need more supporting data. Wider acceptance and use should come only after more studies with larger numbers of subjects demonstrate that CBD works. Unless researchers pick up the pace and begin producing more test data, or CBD develops into a true cultural phenomenon, expect to see a “For Lease” sign on that little CBD shop on the corner. Mike James, Ph.D., a pharmacologist who’s published more than 20 peer-reviewed articles, has researched neuropharmacology, endocrinology, metabolic, oncology and cardiovascular diseases.
august 2019 | luckbox
TH E E A NXOI TY E C N OMY
KEY REASONS THE CBD MARKET WILL KEEP GROWING From pharmaceuticals to ingestibles, a prominent research firm quantifies the recent ascent of the CBD consumer phenomenon By Brightfield Group
he U.S. CBD market will grow more than seven-fold this year because the 2018 Farm Bill legalized hemp-derived versions of the chemical compound. The legislation has created a whole new legal CBD market, and consumers of all stripes are already snapping up CBD-related products. Brightfield Group’s analysis of CBD’s potential provides an overview of the industry’s prospects during the next few years. If just a few reasonable assumptions come true, the CBD market should prosper. Previous Brightfield estimates assessed the hemp-derived CBD market as a grassroots movement with growth held at bay by a burdensome regulatory system and limited formal retail and marketing channels. Today’s estimates anticipate the Food and Drug Administration (FDA) will sanction CBD, helping a fully operating formal market develop during the coming months with growth blooming over the five-year forecast period.
The data scientists, analysts and researchers at Brightfield Group are focused on the legal CBD and cannabis industries. Their 75-page, July 2019 report, Hemp-Derived CBD; Market Overview & Analysis, incorporates information from interviews with hundreds of manufacturers and retailers, and detailed consumer sales and survey data from thousands of hemp-CBD users. brightfieldgroup.com
luckbox | august 2019
Influencing market growth The hemp-derived CBD market has been expanding rapidly in recent years but will see unprecedented growth this year, reaching $5 billion in market revenues for a seven-fold increase over 2018. The CBD market is expected to grow to more than $23 billion by 2023. Brightfield Group bases forecasts on the premise that the FDA will issue a revised policy that establishes a framework for the legal sales of CBD products that comply with the rules. That includes CBD-infused foods and supplements. By the middle of next year, it will free up more mass retailers to begin carrying CBD products or expand their current CBD offerings. It also will attract additional major manufacturers from other industries— like consumer packaged goods, cannabis and nutraceuticals—to enter the sector. Some mass retailers have already entered the market, led by major pharmacy chains and—most recently—grocery chains. Given their reach, scalability and mainstream familiarity, the big chain stores are expected to garner 57% of CBD market revenues this year. Over the short- to medium-term, the expansion will continue on existing pharma and grocery fronts, while spreading to supercenters, gyms, pet stores, natural grocers and other big box retailers. As CBD has changed from a niche product to a full-blown mainstream wellness phenomenon, it’s reaching more consumers across the age, gender, regional and political spectrums. Millions of new CBD consumers are flocking to the market as products become available in more familiar formats, including anti-aging
cream and multi-vitamins versus tinctures. CBD products are also appearing in more varied and accessible outlets, such as Walgreens and Kroger versus local smoke shops. Meanwhile, marketing and strategic positioning are improving and now include athletic and event sponsorship and influencer campaigns. As a result, approachable products like topicals, skincare and beauty products, pet treats, and vapes are posting impressive growth numbers. While tinctures remain a mainstay of the market, their share is declining as more-mainstream and consumer-friendly products surge. CBD-infused food and beverages are gaining traction as the cannabinoid makes its way into the limelight, but some continue to be perceived as the riskier products in the face of FDA statements regarding ingestible CBD. But growth will continue to swell, as clinical trials establish the medicinal value of CBD, driving pharmaceutical and other research dollars to the market, ultimately increasing the number and variety of applicable uses. With the entry of marketing, manufacturing and retail behemoths onto the scene, hemp-derived CBD is changing from a grassroots movement driven by word-of-mouth marketing into a full-fledged competitor on the nutraceutical, e-cigarette, food and beverage markets, and sales are exploding. CBD in chain retailers Not long ago, in 2017, nearly two-thirds of CBD sales took place online, with one-quarter coming from smoke shops and dispensaries combined, and only a fraction from natural
U.S. Hemp CBD Market Size and Projections
$ IN BILLIONS
What Did the Farm Bill Actually Change? The Hemp Farming Act won the support of lawmakers from both sides of the aisle and was signed into law in December. It removes hemp and its extracts containing less than 0.3% THC from the Controlled Substances Act of 1970, taking the crop out of the purview of the Drug Enforcement Administration and transforming it from a felony-related controlled substance into an agricultural commodity. Under the Act—which was part of the Farm Bill—the states were granted the right to develop their own regulatory frameworks, as overseen by the U.S. Department of Agriculture, which is expected to approve or reject plans within 60 days of submission. Legalizing hemp invites legitimate industry players to compete with gray- and black-market actors. It provides the good guys with previously unavailable market protections, paves the way for consumers to purchase CBD products without concern about legality and will ensure the quality of CBD products once a regulatory framework is established and safety standards are formulated. Passing the 2018 Farm Bill has helped normalize and sustain hemp and CBD-related products for the long term.
august 2019 | luckbox
TH E E A NXOI TY E C N OMY food stores (8%) and health practitioners (less than 1%). Last year, the market underwent a transformation to become much more brick-and-mortar oriented, with only roughly one-fourth of sales born online and a diverse mix of other channels—primarily natural food stores and smoke shops—accounting for the remainder of revenues. The real impetus for most of this year’s impressive growth is the volume of sales moving through the chained retail channel. The entry of mass retailers into the market commenced with major pharmacy chains, including CVS, Walgreens and Rite-Aid, which began to offer a range of topical products in a limited number of stores around the country at the beginning of Q2. They were soon followed by supplements retailers such as GNC and the Vitamin Shoppe. In mid-year, grocery chains, such as Kroger, began to join the fold. Growth is taking place at such a rapid clip, in fact, that by the end of this year, more than 16,000 chain retailers are expected to carry CBD products. Over the short- to medium-term, expect to see continuing expansion in big box pharmacies and grocery chains as well as the addition of supercenters, gyms, pet, natural food, convenience and other mass retailers. Because of the higher stakes involved, decision-makers in this channel are simply awaiting FDA clarity on a regulatory framework for non-pharmaceutical CBD products before expanding the variety of compliant CBD products offered on their shelves, making them available in all outlets or beginning to carry FDA-compliant CBD goods. Despite FDA-related delays, the vast reach of chain
2019 CBD Market Breakdown by Distribution Channel 5 7% Chain Retailers 2 2% Online 8 % Natural Food Stores 4 % Dispensaries and Delivery Services 4 % Smoke Shops 4 % Others 1 % Health and Alternative Care
retailers is expected to garner 57% of market revenues this year, and 68% by 2023. Big pharma The pharmaceuticals channel is based on products distributed by prescription only, as authorized by the FDA. This year, the only CBD pharmaceutical products are sold by GW Pharmaceuticals (GWP) under the brand name Epidiolex. That’s because the company came up with the pioneering prescription for a plant-based CBD medication and won formal FDA approval. Epidiolex is an oral formulation of purified CBD designed to treat seizures associated with two rare and severe early-onset, drug-resistant
Drinks More than 80% of CBD drink users are age 45 or younger The 2019 CBD drinks market is set to drive $191 million in sales, more than 17 times its 2018 figure 24
luckbox | august 2019
epilepsy syndromes. Despite the small market for rare seizure conditions and supply barriers, Epidiolex sales have been impressive. At least 80 cannabidiol-related clinical trials have been conducted this year or are slated for completion by the end of the year. The same number are already on deck for the next five years, including 43 scheduled for next year alone. It’s likely that only a fraction of the studies will lead to FDA approval of CBD-based medications for epilepsy and other conditions, which will subsequently enter the pharmaceuticals market. In anticipation of this, combined with the continued growth of Epidiolex sales, the CBD pharmaceuticals market is set to reach $2.8 billion in 2023.
Gummies Users lean slightly older, with three-fourths over age 30 The gummy market is set to reach $309 million in 2019, and $715 million in 2023
Incredible edible growth Edible hemp-derived CBD products, such as gummies, candies, chocolate, baked goods and beverages, are not only growing in popularity among current CBD users but also drawing in new users, given their approachability and familiarity to the average consumer. These CBD products have been a useful and popular delivery channel that addresses a wide range of symptoms, especially side-effects from cancer treatment, such as nausea, pain and insomnia. Edibles are often easy on the stomach and have slower release and longer-lasting effects. Because they’re easy to consume, discreet and tend to taste good, CBD-infused edibles are also great for first-time users. Thus, this category has become home to trendy products bolstered by CBD’s sudden launch to fame, inlcuding gourmet chocolates, lattes, and even CBD-infused hamburgers. Though the edibles categories continue to make up a smaller fraction of the market, totaling 12% this year, retailers’ reports are consumer data reflects an increasing demand for edibles—
especially drinks—during the five-year term. Smaller revenue figures reflect a comparatively lower price tag per CBD food or beverages versus products like tinctures. And sales have been dampened this year by the FDA’s decision to prohibit selling CBD-infused food additives—a product category that includes edibles. However, with the impending FDA authorization of edible products, followed by the inevitable entry of behemoth consumer packaged goods companies into the sector, combined CBD edibles sales are set to become a $2.5 billion market by 2023. CBD-infused lattes are sold at cafes throughout the country now but weren’t widely available as recently as last year. Meanwhile, manufacturers are beginning to sell CBD-infused coffee beans. CBD-infused beer has begun to appear at craft breweries, and macrobreweries like Anheuser-Busch InBev are contemplating similar products. Manufacturers are adding CBD to sparkling water, energy shots and workout beverages (including protein shakes). CBD has landed on the shelves at supplement chain
GNC, and Coca-Cola is eying CBD-infused “functional wellness beverages.” U.S. retail sales of sports and energy drinks amounted to approximately $9.6 billion in 2013 and have expanded greatly since then. Beer sales in the country totaled $35 billion last year. In 2016, U.S. coffee and snack shop revenues reached $32.46 billion. Extraordinary opportunities for growth abound in the CBD-infused beverage sector, whether drinks are positioned for functional wellness, athletic endurance or simply as a substitute or supplement to alcohol. Other edibles include anything outside the beverage and gummy categories, such as gum, chocolates, baked goods and savory products. Major manufacturers offering those products include Restorative Botanicals, which carries a caramels line. Diamond CBD sells honey products, cake pops and popcorn. Carl’s Jr. has even rolled out a CBD hamburger. Some edibles haven’t garnered as much attention or traction as drinks or gummy products but will continue to play a secondary role on the CBD market.
TH E E A NXOI TY E C N OMY
REGULATION, PLEASE! AN ADVOCACY GROUP’S UNIQUE PERSPECTIVE
Paul Armentanor, deputy director of the National Organization for the Reform of Marijuana Laws
As in any unregulated but promising market, some unscrupulous CBD merchants are making false claims and selling substandard products By Ed McKinley
eeking someone who understands CBD and can talk about it objectively, luckbox contacted Paul Armentano, deputy director of the National Organization for the Reform of Marijuana Laws (NORML) and the NORML Foundation in Washington. Armentano has studied cannabis and cannabis policy for 25 years with the aim of making marijuana legal for responsible adults. In the process he couldn’t help but learn a lot about CBD because it comes from the same plant. He claims to speak without prejudice about CBD because NORML doesn’t have an economic interest in expanding the market for the product. Besides, NORML considers itself a consumer advocacy group, so he’d like to alert the citizenry to what he considers hazards in the commercial CBD
market—whether online, in health food stores or at gas stations. Armentano’s written for more than 200 publications on the subjects of marijuana policy and marijuana science, and he cowrote a book about cannabis and social policy called Marijuana is Safer: So Why Are We Driving People to Drink? Tell us about CBD. Armentano: CBD stands for cannabidiol,
one of more than a hundred unique organic constituents called cannabinoids found in the marijuana plant. Cannabinoids are chemicals that cause drug-like effects. Scientists identified and isolated CBD back in 1940. As early as the 1950s researchers understood this compound possesses therapeutic properties, including potential as an
anticonvulsant, anti-inflammatory agent, antipsychotic and anti-anxiety agent. What does NORML think about the current furor over CBD?
Much of the narrative surrounding CBD is simply factually incorrect. Unfortunately, almost all of the individuals driving the conversation on CBD have a financial stake in the growth of the CBD industry, and that’s why they’re often confusing on many of the issues. What could bring clarity?
We’re trying to demystify some of the less-than-accurate claims that are out there and calling for the Food and Drug Administration (FDA) to regulate this market. As with any unregulated market there are literally no rules with regard to who can enter the business. No accepted best
CBD and the FDA Congress changed a federal law last year to make it clear the Food and Drug Administration (FDA) will ultimately regulate the market for hemp-derived CBD products. Meanwhile, the FDA has remained adamant that most commercial CBD products are now marketed in ways that violate the Food, Drug and Cosmetics Act. That’s why the FDA has formed a working group to resolve CBD issues, says Paul Armentano, deputy director of the National Organization for the Reform of Marijuana Laws (NORML). But the FDA acknowledges it may take years to hash out regulations that enable the CBD market to operate like other legal businesses. “As of now, it remains largely a grey area, and I foresee that continuing for quite some time,” Armentano contends.
luckbox | august 2019
practices govern the CBD extraction process from hemp. No regulations monitor the quality or the sourcing of the hemp itself.
get away with in a regulated market. It’s gimmick marketing like adding a shot of CBD to your expresso—as though there would be anything therapeutic about that.
Does CBD work?
You’ll find very little doubt among those educated in this space that CBD clearly possesses specific therapeutic properties. It definitely can be therapeutic for some people when used at the proper dosage. How important is dosage?
CBD’s impact is dose-specific. The relatively low amount of CBD in most commercial products would be considered subtherapeutic based on the much-higher doses necessary in clinical trials to yield statistically significant results. As an antipsychotic, the daily doses required are up to 750mg CBD, compared with 5mg advertised on the label of some products. Why are they scrimping on CBD?
Maybe it’s because they’re trying to derive it from traditional hemp plants. Traditional hemp is not a particularly viable source for CBD extraction. Therefore, it’s not surprising that many products that claim to be derived from traditional hemp contain very little CBD. Why’s hemp a bad source of CBD?
Traditional hemp is low in actual CBD. Traditionally, industrial hemp was grown for its fiber content. CBD is a cannabinoid and, like all cannabinoids, it is found most prominently in the flowering tops of the female plant. It’s not found in the stalk, it’s not particularly prevalent in the leaves and it’s not found in the seeds or the roots. So, a traditional hemp plant grown largely for fiber content is not an ideal source for cannabinoid extraction. A more traditional cannabis plant and the flowering tops of the female cannabis plant are going to be the more ideal source. Should consumers accept CBD marketing claims?
It’s a free-for-all with regard to how these products are marketed. I receive unsolicited emails in my inbox just about every day from companies claiming that all the sharks on Shark Tank have gone all-in on a CBD coffee or a CBD-topical product. It’s really offensive to read these things day after day. Unfortunately, you have folks who are ready to dive right into an unregulated market and make claims they could never
Does the public need to protect itself from CBD?
Industrial hemp tends to be a bioaccumulator, which means that it may gather contaminants from the soil and could potentially pass them on to the end user through the extraction process. They also have additives, things in addition to CBD that aren’t supposed to be there. What business opportunities do you foresee for CBD?
Clearly, there is a market. My “Recommended expectation is daily doses are that this market up to 750mg will continue to CBD, compared grow, but if the market continues with 5mg to be unregulated advertised on and is largely the label of filled by ethically some products” challenged players, there ultimately could be a backlash from the consumer. Assuming this market is regulated in the next few years, larger more-traditional players will get involved. But I don’t think that’s going to happen until there is much more clarity in the marketplace. Until then, we’re going to see the market limited to much smaller players willing to take more risk. In some cases, those smaller players engage in predatory practices, unfortunately.
The New Catch-22
In December, Congress amended The Controlled Substances Act of 1970 to carve out an exemption for industrial hemp, which is defined as marijuana fibers with no more than 0.3% THC— the plant’s primary psychoactive agent. The new provision also frees products derived from hemp from federal drug laws. Hence, CBD products have become legal in the eyes of the Feds. But a twist in the law calls for dual licensing, which means anyone who grows hemp or produces hemp products has to possess not only a state license but also a federal license from the Department of Agriculture. Unfortunately, the USDA has yet to finalize regulations that would enable CBD entrepreneurs to apply for a license. Meanwhile, some states have passed rules or laws concerning licensing, while others haven’t. So, no one has both a state and federal license, meaning that no one can comply with the new federal law, according to Armentano. “Any CBD marketer who says their product is legal in all 50 states is lying,” he maintains, adding that “it’s a very standard claim.”
What advice would you offer regulators and legislators?
The FDA recently held its first public hearing on this issue. NORML was one of a number of groups that submitted testimony and called upon the FDA to move forward with regulation. Specific regulatory language is needed for all parts of this chain—from the sourcing of the hemp itself to the extraction of CBD to the standardization and testing of the end product itself to providing greater legal clarity for consumers. There is none today. There certainly needs to be some in the future. What can CBD consumers do to negotiate the CBD market?
We have a 50-state patchwork of marijuana
regulations, but the majority of states have medical marijuana access laws. In most of those states, products have been subject to third-party lab testing and are accurately labeled. Individuals in those 33 states are far more likely to obtain CBD-specific product in a dispensary that is of greater quality than one would find in the commercial market. That is because that dispensary is regulated in a manner similar to many other consumer goods. Individuals who live outside of states that possess such regulation are in a “buyer beware” situation with regard to the quality and purity of those products.
august 2019 | luckbox
TH E E A NXOI TY E C N OMY
THIS CBD MANUFACTURER WELCOMES OVERSIGHT BUT WITH A CAVEAT
Considering a CBD-infused product like The Keeper’s Stash a dietary supplement could limit regulation
Regulators should not limit the public’s access to the THC-free cannabinoid, a CBD entrepreneur says By Ed McKinley
luckbox | august 2019
when CBD is synthetically derived, when it’s riddled with solvents, pesticides, microbials and heavy metals,” she asserts. “There’s risk when you’re dealing with a dirty product.” Duncan finds herself on an email list of about a hundred CBD industry players who receive messages from China bearing an iPhone image of a jar of CBD oil shot against a background that provides no sense of where the picture was taken. “It’ll say honey-cut CBD oil, $700 a kilo,” she recalls. “And that’s far below the price point in the U.S.” The email message doesn’t provide a clue as to where the hemp was grown, who grew it or
what additives have been introduced, Duncan complains. “It’s just scary,” she exclaims. “People have to make an ethical decision about whether they’re in this industry for the right reasons or if they’re just in it to make money.” In contrast to the uncertainty of that offer, Duncan works closely with a hemp farm that tracks its product religiously. She even prints a QR code on her CBD product packaging that customers can scan to view a Google Earth snapshot of the row where the hemp was grown. Besides demanding purity, the FDA could also ensure that marketers don’t make claims that aren’t substantiated by scientific research,
PHOTOGRAPHS COURTESY OF MOWELLENS
ederal regulation could ensure the purity, potency and effectiveness of CBD products while curbing the industry’s unfounded medical claims, overzealous marketing and false advertising. But regulators should stop short of imposing requirements that limit the public’s access to the relaxing benefits of CBD tinctures, ingestibles and topical agents. Those are the thoughts of CBD entrepreneur and advocate Amy Duncan, founder and CEO of Mowellens, a firm she refers to as “a conscious CBD wellness company.” Duncan doesn’t take those positions lightly. She arrived at them after working in the medical device and biotech industries, studying the business side of the American healthcare industry, caring for a spouse stricken with brain cancer, and observing her spouse’s dutiful acquiescence to Western medicine. Oversight by the U.S. Food and Drug Administration (FDA) could include third-party lab testing to ensure the purity of CBD products, Duncan says. “The harm that we see comes
Duncan says. “The packaging and labeling claims that we see put accessibility, the wellness industry and CBD in jeopardy,” she notes. Regulations already ban marketers of herbal or dietary supplements—such as CBD—from claiming their products diagnose, treat, cure or prevent any illness, Duncan says. That means purveyors of CBD products should not make promises on labels or websites about reducing inflammation, anxiety and depression, she maintains. Failing to staunch such claims could result in strict regulation, she fears. Broad marketing claims also cause problems because not everyone reacts to CBD the same way. Duncan takes CBD in the middle of the afternoon to stay productive, while someone else might take the same dose to fall asleep at night. “I hate to paint a false hope for people,” Duncan says of making CBD promises that may not come true. “We like for people to experience it themselves, knowing that they’re not in harm’s way and that they can ask questions,” she says. At any rate, prohibitions on medical claims could end as clinical studies explore CBD’s effects, Duncan says. Anecdotal evidence supports some of the claims and studies could back them up. So far, research into the endocannabinoid system—which regulates some the body’s processes and contains receptors sensitive to THC and CBD—has remained scarce because of the stigma attached to cannabis. In the meantime, Duncan has found ways of conveying what she views as the benefits of her products without resorting to medical terminology. “It has a very calming, relaxing impact on the body and allows you to handle the stresses of day-to-day life,” she says. “It also any can help with any areas of the body that can hold tension. I call it meditation in a bottle.” That brings Duncan to the topic of spirituality and CBD. “When it crosses into ethical questions associated with the industry, it crosses into morals and values of the leaders who are operating and trailblazing this industry,” she says. Many CBD entrepreneurs are women working to do the right thing, she concludes.
Inspiration in Adversity Amy Duncan, who went on to become CEO of Mowellens, a CBD products company, was studying at the University of Missouri at St. Louis in 2007 when she met her future husband, Chris Duncan. He was playing left field and first base for the Cardinals, who were then the world champions. He was also willing to dance to the Cupid Shuffle. They were married in 2011. The next year he was diagnosed with brain cancer. But the surgery and chemo seemed to work, the cancer went into remission, and he learned to walk and talk again. The couple searched for CBD products to ease his suffering but rejected nearly all of them because they weren’t lab tested and had synthetic flavorings and artificial fragrances. So she decided to take a giant leap in 2016. She quit her sales and marketing job at a biotech company to start Mowellens, a provider of CBDinfused ingestibles and skincare products. Then in October of that year a routine MRI scan showed Chris Duncan’s cancer had returned. The couple resumed their struggle and it continues today.
“The reason I entered the industry is this personal journey I had been on,” Duncan says. “I wanted to return to balance, provide for my family, and have flexibility and freedom.” When she made the decision to pursue freedom, all the elements of her life aligned. “I know this is where I was meant to be.” That passion makes Duncan worry that the FDA might go too far if it begins to oversee the CBD industry. If the agency demands the extensive clinical trials required for new pharmaceuticals, it could block the public’s access to CBD for a long time. Instead, she’d prefer the FDA assign CBD to “both lanes,” treating it as both a pharmaceutical and a dietary supplement. That way, the industry could continue to help customers, Duncan says.
Mowellens Adds to its CBD Offerings The family of CBD products sold by Mowellens is expected to increase next month from five to 17. The new roster is slated to include five ingestibles and 12 skincare products. That’s up from three ingestibles and two skincare products. Established Mowellens products bear spiritual names like its best-selling Inner Peace and Lit from Within, or humorous names like The Keeper’s Stash for CBD-infused honey.
Mowellens CEO Amy Duncan sent luckbox to the dictionary twice. Here are the results. Endocannabinoid: Receptors in the body’s endocannabinoid system react to the cannabinoids in cannabis and hemp. The receptors find a home in the brain, organs, connective tissues, immune cells and glands. It’s interesting that the body’s specifically designed to respond to THC and CBD. Pharmacogenetics: The study of inherited genetic differences in drug metabolic pathways is called pharmacogenetics. It identifies an individual’s therapeutic and adverse reactions to substances— such as CBD. Thus it explains why CBD affects individuals differently, or perhaps not at all.
august 2019 | luckbox
TH E E A NXOI TY E C N OMY
CBD: A PHYSICIAN’S PERSPECTIVE
Legalization is so important for people who use cannabis medically on a regular basis By Vonetta Logan
n experienced physician, Chicago-based Dr. Rahul Khare, finds his patients benefit from CBD and THC but cautions against accepting below par products. He recently shared his thoughts on the present and future of cannabis.
for people who use cannabis medically on a weekly basis. Even assuming some recreation, I’d rather have my patients use a microdose of medical cannabis. It’s less addictive and has no liver toxicity. It does impair you but not to the extent that alcohol does. If you’re using it medically more than a couple of times a week, you’re going to save 30% on the taxes. That’s a huge amount. Secondly, you can grow up to five plants at home if you’re using it for pain or anxiety (in Illinois). You will know exactly where it came from and exactly what’s in it. There’s something beautiful about growing your own medicine. How would you prescribe for pain management?
Now, we have high CBD content cannabis. It used to be just ibuprofen and Tylenol. Now there’s something stronger if you can’t sleep at night because of pain. Cannabis is the go-to. Yes, it’s great. A small micro dose of edibles is really changing the way we’re dealing with pain management.
Does the public need to protect itself from these products?
Well, yes and some of it is garbage. Some of it is coming from China. Don’t buy your medicine from the grocery store. Buy it from a reputable source and only buy something that’s been lab tested. All CBD is not made the same. It’s not FDA approved, it’s not looked at by the government and it’s not quality-tested. To be certain of quality you probably have to pay a little bit more. But it is worth it for anything you are putting in your body. How would you prescribe for anxiety relief?
It is going to take you down from a baseline anxiety of six or seven (out of 10) to a four or five. It’s not going to reduce it all of the way. But, it is a natural way to decrease anxiety. How important is dosage?
You can’t really overdose on it. But you don’t want to take too much because with any medication you should take the smallest amount that works. With CBD you want to start with about 8mg twice a day, and then you can up-titrate.
What advice would you offer cannabis users?
If you use cannabis get your card. Then you can go to the dispensary and freely talk about it with educated people and you can pick your strains and know what you are getting. Now you have a lab-tested cannabis. Let’s step away from cannabis and talk about hemp and the CBD products. If you’re going to buy CBD, go to a place where you can look at all the different types for your symptoms, and then try it for a month. If it doesn’t work for you, so be it. But if it does, then you always will have it if there are times in your life when the anxiety goes up or your chronic pain flares up, and you will know what to do.
To hear the complete interview with Dr. Khare, visit the Connect the Dots podcast, hosted by luckbox contributing editor Vonetta Logan.
Rahul Khare, M.D., founded Innovative Express Care, an urgent and primary care center in Chicago’s Lincoln Park neighborhood. It focuses on mental health therapy, medical cannabis certification, pain management, ketamine and MedSpa. It’s at innovatewell.com. Khare spent six years at Northwestern Memorial Hospital, where he was assistant director of operations in the department of emergency medicine, and was an urgent care physician at Chicago’s Wrigley Field for eight years.
luckbox | august 2019
PHOTOGRAPH COURTESY OF DR. KHARE
Your thoughts on legalization? Dr Rahul Khare: It’s great. It is so important
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TH E E ANX I TY A O E C N OMY
LOW EXPECTATIONS FOR THIS HIGH FLYER Analysis of a contrarian take on Aurora Cannabis, a favorite marijuana stock among younger investors By David Trainer & Sam McBride
urora Cannabis (ACB) has been on a tear for the last two years, but the company still has a long way to go to justify the market hype. Unrealized derivative gains led the company to an accounting profit last year, but real economic losses continue to mount. Meanwhile, the company’s deceptively high revenue growth rate has been driven primarily by large acquisitions that burn cash and dilute shareholders. Share count has increased by more than seven times in recent years. Longterm, Aurora needs to grow revenue by 67%
compounded annually for nine years and achieve net operating profit after tax (NOPAT) margins of ~20% (equal to Pfizer) to justify its $7.50 per share valuation. “Very Unattractive” return on invested capital Return on invested capital (ROIC) measures a company’s return on all cash invested in the business. It’s the truest measure of profitability. Stock valuations are more highly correlated to ROIC than any other metric. Weighted-average cost of capital (WACC) is
the average of debt and equity capital costs that all publicly traded companies with debt and equity stakeholders incur as a cost of operating. Companies must earn an ROIC greater than WACC to generate positive economic earnings and create value for shareholders. Aurora’s ROIC of (7%) for the trailing 12 months earns a Very Unattractive rating. ROIC is calculated as NOPAT of ($202) million divided by average invested capital of $2,893 million. “Very Unattractive” free cash flow Free cash flow (FCF) reflects the amount of cash free for distribution to all stakeholders (including debt and equity). FCF Yield divides free cash flow by enterprise value, which measures a company’s total value. Using free cash flow yield to pick stocks is not a new strategy. However, there’s strategy that yields better results because it uses a better measure of free cash flow. In the same way New Constructs’ EEPS is a better measure of profitability than reported EPS, the New Constructs measure of FCF is better than traditional accounting-based FCF. Aurora’s FCF is ($3.09 billion) for the trailing 12 months, and its current enterprise value is $8,3 billion. FCF Yield is (37.2%) and earns a Very Unattractive rating. EBV book value is “Unattractive” Price-to-economic book value (EBV) measures the difference between the market’s expectations for future profits and the no-growth value of the stock. EBV measures the no-growth value of the company based on the company’s NOPAT. When prices are higher than EBV, the market predicts the company’s NOPAT will increase and expectations for profit growth are reflected in the stock. If the stock price equals EBV, the market predicts NOPAT will remain the same and there are no expectations for profit growth reflected in the stock. When stock prices are lower than EBV, the market predicts NOPAT will decrease and expectations for permanent profit decline are reflected in the stock. In general, New Constructs likes to buy stocks with low expectations for profit growth and sell/short stocks with high expectations for profit growth. Aurora’s current price-to-EBV per share is (2.3) and earns an Unattractive rating. Aurora’s stock price is $7.48, and its EBV per share for the trailing 12 months is ($3.30).
ACB: Very Unattractive Aurora’s ROIC of (7%) for the trailing 12 months earns a Very Unattractive rating from New Constructs
Making adjustments New Constructs made 18 adjustments to convert Aurora’s reported 2018 earnings to net operating profit after tax, for a net impact of $106 million. Seven income adjustments of $172 million were made against 11 expense adjustments of $65 million. Only 1% of companies requires more adjustments to reported earnings as a percent of revenue than Aurora to calculate NOPAT. New Constructs made four adjustments for a net impact of $733 million to the discounted
cash flow model for Aurora in the trailing 12 months, consisting entirely of adjustments that decrease value. The most notable accounting distortion to the valuation metrics for Aurora in the trailing 12 months was the value of outstanding employee stock options (ESO) after tax. It was necessary to adjust shareholder value by $129 million, which is 2% of the firm’s market value. ESOs represent a liability based on future share dilution as employees exercise their options and add to the number of shares outstanding.
We believe Aurora embeds a Very Unattractive level of market expectations because of the large difference between the expected financial performance implied by its market price and the company’s historical performance. We recommend investors sell ACB. David Trainer is CEO of New Constructs, an independent equity research firm that uses machine learning and natural language processing to parse corporate filings and to model economic earnings. Sam McBride is an investment analyst at New Constructs. @newconstructs
Ways to get sort Aurora Cannabis (ACB) The implied volatility (IV) of Aurora Cannabis (ACB) is approximately 46%. That means the stock is expected to increase or decrease in price by 46% over the next year. Compared with other cannabis-related stocks, it has a lower-than-average volatility—46% versus 66% within the sector (see Cherry Picks,pg. 50). The IV Rank of ACB is also toward the low end of its range. That implies that the stock is considerably lower than its average volatility over the past year. Several methods will achieve short exposure. Analysts at tastytrade provide some lower-risk alternatives to “naked” shorting the stock. Short Stock
Long Put Spread
Probability of success
The less paid for an in-the-money put option, the higher the probability of profit. Generally, though, the probability associated with the position is considerably less than 50%.
Can be as high as 90%, but generally around 50% if the strike bought is higher than the current price and the strike sold is less than the stock price.
Capital required to initiate the strategy (in a margin account)
This is a “hard to borrow” stock. It may be difficult to sell the stock short.
The cost of capital for in-the-money puts is 5% to 20% of the stock’s price. Far out-of-the-money options can be cheaper to purchase, but the odds of success are considerably smaller.
The price paid for the put spread. A spread placed at the current price is roughly 50% of the price range.
The risk is theoretically unlimited to the upside.
The risk of loss is limited to the amount paid.
Limited to the amount paid for the spread.
Avoid short selling “hard to borrow” stocks. The risk and the costs associated with the position make profitable positions difficult to obtain.
Avoid this lower-probability trade because it is theoretically impossible to increase the odds of success to above 50%. In addition, the high volatility makes put options particularly expensive to purchase.
In practice, a put spread often does not have a high probability of success, but the limited profit and risk make this a suitable strategy to speculate on the direction of the stock.
august 2019 | luckbox
trends life, luxury & the pursuit of happiness
8 Favorite Fidget Toys The anxiety-related consumer products market is expected to grow to $7.5 billion by 2023
By Rocio Villaseñor
luckbox | august 2019
The Fidget Spinner
Think Ink Fidget Pen
Various vendors and versions
Fidget spinner prices range from as low as $2 for a basic model to $1,000 for an LED light-embedded limited edition collectible. Russian jewelry specialists Caviar created the world’s most expensive fidget spinner, which has a 100-gram, gold-coated exterior and a value of about $17,000. An estimated 50 million fidget spinners have been sold.
Launched on Kickstarter and made from durable titanium and steel with lots of detachable and reconfigurable parts, this pen can flex, spin, slide and twist. The pen barrel flexes like a spring, the magnetic clip can slide along the pen or detach altogether, the top has a spinnable magnetic sphere, and it writes well, making it the most practical toy on the list.
PHOTOGRAPHS COURTESY OF VENDORS; SHUTTERSTOCK
n the Fall of 2016, two Kickstarter campaigns were launched with modest ambitions. The entrepreneurs hoped to raise around $20,000 to finance consumer products that could address anxiety—the most common mental health problem in America. A startlingly strong response brought in nearly $6.5 million to develop the Fidget Cube and set the stage for the ubiquitous Fidget Spinner. Meanwhile, the sleep-inducing Gravity Blanket raised $4.7 million and has since sold more than 70,000 units. By May 2017, all 20 of the topselling toys on Amazon were either Fidget Spinners or Fidget Cubes. “Anxiety consumerism” has since hit full stride with adult coloring books, aromatherapy vapes and oils, and meditation apps. The anxiety-related consumer products market is expected to grow to $7.5 billion by 2023. The always fidgety luckbox editorial team sifted through dozens of anxiety-reducing fidget toys to come up with this short list of favorites.
The Flippy Chain Fidget
Luxury Infinity Cube
Various vendors and pricing
The Fidget Cube
Pendulum Fidget Toy
12-Sided Fube Fidget Cube Dice by PILPOC
This toy is made from little more than two inches of stainless steel chain links and O-rings wrapped around durable silicone. The pieces interlock to “move the flippy chain into countless shapes and positions for hours of fun fidgeting,” the maker says. The gadget is marketed to “relieve stress, help with ADHD, anxiety, autism or brainstorming.“ This one is hard to put down.
From the original inventors of the “desk toy for anyone who likes to fidget,” the Antsy Lab Kickstarter campaign raised nearly $6.5 million despite only a $15,000 ask from designer brothers Matthew and Mark McLachlan—perhaps signaling the launch of a new toy industry.
The Orbiter, one of the most unusual fidget toys, has two parts. It’s made with a Grade 5 titanium base with a polished neodymium magnet slice in the center, and a frictionless steel ball bearing. Caution: This toy is so addictive it may be stress-inducing!
This toy, made of sturdy stainless steel with machined grips, has arms with bearings for friction-free movement. It’s based on “Chaos Theory of a double pendulum and random motion where the motions are unpredictable for every spin,” according to the manufacturer. It can even flick and spin to create random movements. It’s the luckbox favorite.
For higher anxiety, try this smart-looking luxury stress management toy that comes in two colors: anodized silver or matte black. It’s made of aluminum and hand-finished with brass pins. Nudge or rotate the eight small cubes in any direction to form structures.
This next-generation, dodecagon anxiety cube can fidget in 12 different ways. That’s because of its switches, sliders, squeezable rubber protrusions, knobby thumbmassaging side. Its spinning, clicking and pushing combine to create a great way to negate anxiety.
august 2019 | luckbox
A New Take on the Highball
CBD is showing up everywhere, even in cocktails. So luckbox asked contributing editor and Fake Financial News columnist Vonetta Logan to check it out By Vonetta Logan
Kuma’s CBD cocktails are presented in handcrafted bongs and served with skull shot glasses
luckbox | august 2019
PHOTOGRAPHY BY GARRETT ROODBERGEN
uma’s on Fulton is at the epicenter of Chicago’s new food mecca, the Fulton Market District. Even before you set foot inside, the thrashing beat of heavy metal rearranges your internal organs. On the day of the “drinking for science” challenge, the temps had climbed well into the 80s, so Kuma’s sliding front windows were open and people sat outside happily munching on towers of hand-cut fries and burgers so large they should have their own cardiologist. The place’s newest claim to fame is offering one of the area’s first selections of handcrafted CBD cocktails. As bar manager Bryn Gleason explained: “Making cocktails that we light on fire, that are smoking and things like that are definitely embraced here. So I figured why not go over the top? I had custom bongs made, we got dry ice and we made three different drinks inspired by three different strains of weed.” Her curated offerings include drinks aptly named: Ablaze—Pineapple Express: sweet pineapple balanced with a sneaky hint of spice and rum; Dopethrone—Purple Haze: delicately floral, gin-based with hints of hibiscus and lavender; and Hazemaze— White Widow: a Mezcal based drink with notes of anise and lime and mint. Gleason admits she’s not that into cannabis, so when she took a field trip to a cocktail lab she brought bussers, bar backs and bartenders who were…let’s just say more well-versed. Like any good cocktail curator, she had questions. Does Pineapple Express actually taste like pineapples? Chicago-based Euphoric brands created a CBD-based simple syrup that Gleason uses
as the base for the CBD DRINK CBD HERE cocktails. “They refined the syrup a little bit for me Kuma’s because I wanted it to be West Loop more like a regular simple Chicago syrup and they were able Dopethrone ($16) Cocktail inspired by to thin it down for me Purple Haze strain with the same amount of Ablaze ($16) CBD,” she notes. Cocktail inspired Each drink packs by Pineapple Express strain about 20mg of CBD, the non-intoxicating form of Hazemaze ($18) Cocktail inspired by cannabis derived from White Widow strain hemp. Gleason took the Harsh Your syrup home because Mellow ($6.66) she was working on Shot of CBD Syrup her creative process. “I wanted to know what I was working with and what I was going to be giving people since I’m used to giving people alcohol. I wasn’t sure how CBD would play into that, but it was really chill. It was just calming for me. I didn’t feel sleepy and didn’t feel weird. I just felt calm.” The patrons I spoke to couldn’t specify exactly how the CBD was working on their senses. “Is it alcohol or is it me feeling the CBD?” one asked. “I just feel good. It’s hard to tell what is affecting me first.” The presentation’s a delightful surprise. Each drink is served in a custom glass bong, and the dry ice adds “smoke” to each drink as the server delivers it to the table. Patrons uncork the bong and pour the libation into a skull shot glass. It’s definitely made for Instagram. But they’re not just pretty to look at. Gleason took her time balancing the flavor profile of each cocktail. The Pineapple Express is bright yellow and has an unexpected kick of spice that burns (in a good way) on the way down. The Dopethrone has a vibrant violet hue and will convert anyone who’s not a fan of gin. It’s floral forward but not overpowering, and it smells so good it could be a high-end candle. The Hazemaze is nearly neon green, and it’s like smoking a pack of Kools. It burns but it’s mentholated minty all at the same time. Gleason says the clientele has been diverse. If you’re 18, you can get a CBD shot added to a non-alcoholic drink. She says older customers come in and giggle over the bongs, reminiscing. “I feel like it’s a very fast-growing trend though people are starting to figure it out and they come in and are like, ‘Oh, my gosh! CBD cocktails! We have to try one of those.’ So, yeah, people are embracing it.”
Bartender Bryn Gleason spent time in an actual lab to create CBD cocktails for Kuma’s
Nannoz Syrup from Euphoric Brands provides 20mg of CBD per 0.5oz serving
“Is it alcohol or is it me feeling the CBD? I just feel good. It’s hard to tell what is affecting me first.”
Vonetta Logan prepares to drink a CBD cocktail “for science”
august 2019 | luckbox
Strap on & Calm Down A new wearable device works with the body’s nervous system to reduce anxiety By Jeff Joseph
wo-thirds of the full-time American workforce feel “burned out” from chronic workplace anxiety, while some 120,000 Americans die from stress-related illnesses each year. In late May, the World Health Organization (WHO) officially recognized burnout as an “occupational syndrome.” The WHO cites “feelings of energy depletion or exhaustion and reduced professional efficacy” as symptoms. Burnout significantly increases the risk of heart disease, high cholesterol, Type 2 diabetes, musculoskeletal pain, prolonged fatigue and even mortality before age 45. Now, there’s an app for that. Apollo Neuroscience, a new wellness technology company created in response to concerns about work-related stress, aims to relieve anxiety and enhance cognitive performance by increasing energy, sharpening focus, promoting social skills and improving sleep habits. CEO David Rabin and co-founder Kathryn Fantauzzi teamed up to create a device capable of treating these stress-related problems in a non-invasive way. Besides serving as chief innovation officer, co-founder and
co-inventor at Apollo, Rabin is a board-certified psychiatrist and a translational neuroscientist. He’s been studying the ravages of chronic stress in humans for more than 10 years. He says Apollo has shown itself effective in case studies, universityled trials and beta tests. In fact, 95% of users report enhanced productivity, focus and sleep when wearing the device. Apollo works by delivering vibration patterns through a watchlike wearable that the company says increases body resilience. These vibrations have been proven to help the user’s ability to recover physically, perform under stress and stay calm. In a luckbox test of the Apollo, its performance met the company’s claims. Moreover, the tester (a self-described “anxious sleeper/ borderline insomniac”), found the device effective at calming restlessness and contributing to better sleep. Rabin affirms that the Apollo has been clinically validated to improve heart rate variability (HRV), the most reliable predictive measure of how well the body adapts to and recovers from stress. While many wearable devices (including the Apple Watch) track HRV,
they do nothing to improve it. By signaling safety to the body, Apollo naturally improves HRV and restores homeostasis, helping users focus, fall asleep faster and practice mindfulness more easily. Apollo users can track improvements in their sleep and biometrics within the mobile app. The Apollo will become available to consumers this fall for $30 per month for a six-month subscription at apolloneuro.com. The wearable device will be included with the subscription at no additional cost.
U.S. businesses suffer $63 billion in lost productivity annually because of chronic stress at work
APOLLO luckbox lab test: After 10 days of wearing the beta version of Apollo’s anxiety-reducing wristband, a luckbox editor became fond of several of the many specialized settings. While the pulsating “recharge” settings (Buzz Buzz and The Jolt) seemed a bit disturbing—almost anxiety-inducing—the overall experience proved positive, particularly as a way to jumpstart the day (Energy Boost & Brainstorm) and to wind down for sleep (Chill & Sleepy Town). The vibrations seemed to sustain a feeling of calm throughout the day. The sleek and lightweight wearable makes its debut this fall.
luckbox | august 2019
4 out of 5 good vibrations
La Dolce Vita: THC-infused Sugar
This first-mover cannabis sweetener hopes to earn $3 million in first-year revenues By Jeff Joseph
hoogies, a (THC) cannabisinfused sweetener, is hitting dispensary shelves throughout California. It’s available with agave or cane sugar, and the manufacturer hopes it can “elevate” the way users eat, cook and mix cocktails. Shoogies co-founder and CEO Latham Woodward says the
product provides the benefits of a low dose of THC of cannabis that’s easy to use and won’t offend observers who may be put off by more traditional methods of cannabis consumption. It’s also great for people who want the effects of cannabis without the need for smoking or vaping. Woodward’s wife inspired the
product after one of her friends “had a bad gummy bear experience from super-saturated THC,” definitely a First World problem Woodward hit the labs to develop a solution in the form of a “mellow” high. “Not stoned, but satisfaction,” he says. Shoogies was born as a low 5mg THC dose—a portable cannabis product a consumer could use anytime and anywhere. “What we wanted was to have a product that didn’t require re-learning things in your life,” Woodward says. “You don’t have to go to a shop to buy a bong or papers. You don’t have to have some special apparatus. You’re going to incorporate Shoogies products into your life, the way you already use these products anyway.”
“THC in general is not about curing your problem. It’s giving you the ability to forget what ails you for just a little bit and give you some relief. Mental relief is half the battle.”
—Latham Woodward, Shoogies CEO
$24 for a box of (20) 0.25 oz. sugar packs $28 for box of (20) 0.25 oz. agave packs shoogies.com
luckbox lab test “The sweetener with benefits,” delivers on its marketing promise. It’s well packaged, easy to use, dissolves easily in liquids and, most importantly, provides a manageable dose of THC consistent with the desired effects of “microdosing.” The product produces a pleasant ascent that’s followed by a symmetrically balanced landing. It yields a Gaussian euphoric distribution without unnerving fat tails. Consider it an ideal entry-level product for the cannabis curious.
5 out of 5 a predictable, portable and reliable THC delivery system
august 2019 | luckbox
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ARTS & MEDIA
AN ECONOMIST WALKS INTO A BROTHEL It takes a certain type of economist—someone who’s devoted years to analyzing data but also possesses a keen eye for the quirks that guide humanity—to take apart, scrutinize and explain risk. And that’s why Allison Schrager’s provocatively titled book, An Economist Walks Into a Brothel and Other Unexpected Places to Understand Risk, makes for a fascinating read. It turns out there’s much more to risk than one would assume. Yet, as Schrager peels the onion and examines the layers, many of her observations aren’t that shocking. Much seems obvious, but in this book, it’s formulated in a way that feels new and enlightening. Life is risky. Anything can happen. Not everyone’s programmed the same way. Some people are risk-averse and some love pushing to the edge. So what happens is almost always a matter of choice. Starting with these realities, the author introduces ways of dealing with risk to achieve goals. She explains these subtexts in a series of true stories about how risk-takers have thought about and managed challenges. The protagonists in these stories include a brothel owner, a professional poker player, a military organization and David Bowie, the rock star. Their personal tales are among the episodes that provide the starting point for the author to lay out her compelling presentation. As the Yiddish proverb says, “Man plans and God laughs.” But the book is filled with accounts of failed attempts to stack the odds. The individual stories flesh out the “Five Rules” the author
introduces early in the book. The rules begin with simple statements like “No Risk, No Reward,” “Get the Biggest Bang for Your Risk Buck” and “Uncertainty Happens.” Risk, it turns out, is far more than a simple reality of life. As framed by Schrager, understanding, managing and massaging risk is a key to success in life. When uncertainty arises, “it is possible to plan for the unplannable,” she writes. “It often comes down to managing the risk you can imagine and retaining just the right amount of flexibility for the unexpected.” As an experienced professional trader of equities and their derivatives, I found this book resonated in a special way. Traders live with risk. It’s built into every position we take. And every trader tells stories of catastrophic decisions as well as glorious successes. Sometimes luck—good or bad— determines the success of a trade. But in every trade the management of risk is crucial. While An Economist Walks Into a Brothel is written for everyone, it’s a perfect primer for traders. Schrager’s insightful analysis includes forays into riskmanagement techniques from financial economics. Hedges and insurance, she explains, contain elements that aren’t obvious. This speaks to the very core of what traders do. As the author says: “The central lesson from financial economics is that risk is the cost we pay to get more.” Smart risk takers don’t back away from risky situations, she writes. Instead of debating whether to take a risk or take a pass, people should calculate the level of risk they’re willing to take and then reach out
to achieve their goals. As Schrager puts it: “Measure the risk involved and then take only as much as you need in order to get what you need.” It’s a view that works in everyday life and in trading as well. —Mike Hart, tastytrade, @mikehart79
AN ECONOMIST WALKS INTO A BROTHEL
4 out of 5 enlightening case studies of risk and reward through the eyes of an economist
august 2019 | luckbox
ARTS & MEDIA
HIGH TIMES In 1974, an underground journalist used drug money to launch High Times magazine in a basement office. It was supposed to be a single-issue spoof of Playboy, complete with lurid centerfold photography of obscenely big buds. But the magazine found an immediate audience and for more than four decades has remained true to its core counter-cultural cannabis advocacy platform. Despite competition from more than 25 weed rags vying for a piece of the fastest growing (legal marijuana) industry in America, High Times remains the indisputable “Magazine
of High Society.” As more states legalize recreational marijuana, new products based on CBD and THC flood the market, providing High Times with a steady stream of ad revenue. And the ads are as entertaining and informative as the articles. The August issue carried 75 advertisers in 130 pages, including Dina Cookies, Big Mike’s Blends, Cheeba Chews, (Mike) Tyson Ranch, app-based delivery services, a curious discount coupon for electronic urine warmers, and KushieJobs—a cannabis industry headhunter. The articles are timely, topical
THE ANXIETY GUY The Anxiety Guy, a top-ranked iTunes podcast, outdoes the competition. That’s an accomplishment because host Dennis Simsek used to want nothing more than to blend in during his years of frequent episodes of panic. He draws on that six-year struggle with anxiety to relate to his listeners and coach them to a better life. Simsek’s anxiety first struck during his peak years as a professional tennis player, crushing his ability to perform on the court and socially. Now, his recovery adds to his credibility because he recognizes what anxiety is like and knows what helps him work through it. This authenticity shines
through on his podcast. His certifications include master neuro-linguistic programming
luckbox | august 2019
practitioner and certified cognitive behavioral therapy (CBT) life coach. As a life coach, he emphasizes the importance of setting goals and thinking ahead to avoid roadblocks to recovery. Meanwhile, his own progress serves as proof of the effectiveness of CBT coaching.
Aside from his credentials, Simsek’s now positive outlook on anxiety management reassures listeners still suffering from the malaise. His very real experiences translate as raw but relatable. While each podcast speaks
directly to individuals, he’s keen on community-building. He creates a highly connected space where the feeling of “we” is instilled in each listener. The Anxiety Guy provides actionable strategy for selfempowerment. Simsek advises
and informative. Typical issues explore cannabis culture and provide DIY growing tips. Writers examine the range of strains and report on manufacturing, distribution, legislation and advocacy. The magazine even serves as an essential consumer catalogue. What’s more, the publication’s value-priced at $6.99. In 2017, a group of investors that included musician Damian Marley purchased a 60% stake in the monthly magazine, website and the High Times event business, which includes The Cannabis Cup. The deal was reportedly valued at $70 million. Talk about high times. —Jeff Joseph
5 out of 5 from seed to weed, there’s no better read
that “all power is from within and is therefore under our control.” He avoids casual chit chat, attacking the root cause of the problem instead of the symptoms. His coping strategies are based on action and use fear as motivation. According to Owl Tail, a podcast discovery platform, the three most popular episodes are:
1. O vercoming Health Anxiety— Convincing Yourself You’re Healthy (#55) 2. L earning to Control Your Mind Through Mental Health Challenge (#3) 3. E nding Generalized Anxiety Disorder in Six Essential Steps (#4) For anyone confronting anxiety, the podcast emerges as a top pick. —Jessica Christoffer
THE ANXIETY GUY
4 out of 5 relatable and educational, offering candid advice from a recovering victim of anxiety
Sleep More, Perform Better
Want a surefire way to get slower, weaker, fatter, sicker and poorer? Sleep less than seven hours By Jim Schultz
handful of universal principles guide serious fitness enthusiasts. In one example, weightlifters take it as a matter of faith that squats develop the quads, strengthen the hamstrings and even defuse marital disputes. Another one? Lack of adequate sleep is destructive. A study of weightlifters by the Centre for Sport and Exercise Sciences at John Moores University in the UK measured partial sleep deprivation against normal sleep. The research showed sleep deprivation has a significant negative impact on bench press, leg press and dead lift exercises, and daily mood checks showed a significant increase in confusion and fatigue. Sleep is crucial to the physiological, biochemical and cognitive restoration of the body. But lack of sleep doesn’t just reduce athletic performance and sabotage squat day. It also leaves a dark cloud hanging over daily activities. Headaches abound, brain fog sets in and anxiety spikes. Athletes need sleep, and so do
Number of American adults with a sleep disorder:
proactive investors. Insufficient sleep can materially slow reaction time and impede decision making. Studies have shown that even a low level of fatigue can impair reaction times as much or more than being legally drunk. Sleep deprivation has an impact comparable to intoxication by alcohol. Reduced sleep weakens motivation, interferes with focus, impairs memory and slows learning. Without sleep, the brain struggles to consolidate memories and absorb knowledge. Sleep loss alters the brain’s frontal lobe and saps decision-making abilities. Probabilities make life’s most important rules simple, and here’s an example: Get more than seven hours of sleep every night.
Jim Schultz, Ph.D., a derivatives trader, fitness expert, owner of livefcubed.com and the daily host of From Theory to Practice on the tastytrade network, was named North American Natural Bodybuilding Federation’s 2017 Novice Bodybuilding Champion. @jschultzf3
Sleep aids Over-the-counter sleep aids and their potential side effects: D iphenhydramine (Benadryl, Aleve PM) and Doxylamine (Unisom). These sedating antihistamines produce side effects that might include daytime drowsiness, dry mouth, blurred vision, constipation and urinary retention. M elatonin. The hormone melatonin helps control the natural sleep-wake cycle. Research suggests melatonin supplements might help treat jet lag or reduce the time it takes to fall asleep—although the effect is typically mild. Side effects can include headaches and daytime sleepiness. V alerian. Supplements made from this plant are taken as sleep aids. Valerian generally doesn’t appear to cause side effects. Source: Mayo Clinic
Who’s getting the most sleep? 1
Netherlands New Zealand 8h/5.5min 8h/4min Source: Science (journal)
of adults in the United States are getting less than seven hours of sleep each night
3 France 8h/3.2min
People who get less than seven hours of sleep per night have an increased risk of obesity, heart disease, diabetes, stroke, depression, arthritis and kidney disease. august 2019 | luckbox
THE NORMAL DEVIATE
The Weather Trade
Unlike the weather, probability-based investment strategies prove surprisingly predictable By Tom Preston
People can trust probabilities in trading more than they can trust the weather forecast. 44
luckbox | august 2019
total area that might receive precipitation. So, if the meteorologist thinks there’s a 60% probability rain could fall on 70% of the area, there’s a 60% x 70% = 42% probability of precipitation. Hmmm, OK. But we live in a specific place. And the meteorologist might make a few drops of rain count as much as a downpour. So, yes, the probabilities of the forecasts are right, one supposes, but that still leaves everyone on the hook if they’re in the wrong spot at the wrong time. That’s why they leave the cakes inside. For most people who aren’t farmers, the probabilities of weather are just factoids that don’t have a huge impact if they’re wrong. But if that’s a person’s most frequent exposure to probability, he might develop some skepticism about using numbers to improve his ability to trade and invest. Don’t give in to that temptation. Dismissing probabilities in trading can have real financial consequences. Doing it is akin to tossing money around like a leaf in the proverbial wind. Part of the job at luckbox (the Trades and Tactics sections, in particular) is to show why people can trust probabilities in trading more than they can with the weather reports, and how to use them to one’s advantage. Meteorological models remain largely opaque but the models used in trading are transparent. Trading models are based on readily observable market data, like the price of a stock, a number of days in the future and the volatility of the stock. Apply those stats to a bell curve to generate the probability that the market cap of Apple (AAPL) will one day
get back more than $1 trillion or that crude oil will stay below $65 per barrel. Are trading probabilities reliable? Well, investors have been using many of the same time-tested tactics for the past 25 years or so, and choosing a smart strategy based on them, gives traders a better chance of making money than not. If having a better chance to make money doesn’t make investors pay more attention to trading probabilities than to the weather, they could be missing out on the most delicious cake of all. Tom Preston, luckbox features editor, is the purveyor of all things probability-based and the poster boy for a standard normal deviate.
Sometimes it’s important to know when it’s going to rain. Just ask the people driven from their homes by flood waters near Fort Smith, Arkansas.
PHOTOGRAPH: REUTERS/ DRONE BASE
ot everyone wakes up thinking about proactive investing—but most contemplate the weather almost every day. In fact, the Weather Channel is piped into something like 79 million American homes. That’s about 61% of all the households in the United States. And that’s not counting all the news websites with weather pages or the mobile apps that send alerts. So, weather news has tremendous reach. But many of the Americans keeping tabs on weather don’t really trust the forecasts. And who can blame them? When Jimmy Webb composed “MacArthur Park” and included the lyrics “someone left the cake out in the rain,” it was ostensibly about a love gone wrong. But it’s remained memorable because getting caught in unexpected precipitation has been one of the low points of human experience since caveman days. It only takes getting soaked one time when the forecast calls for sun for people to leave the cake inside for the rest of their lives. That was the old days, though. Today, forecasts attach probabilities about how much rain or snow might fall. Meteorologists are brimming with confidence about that number. On the National Weather Service the “probability of precipitation” (or POP) is the probability that precipitation will fall somewhere in the area times the percent of the
FORECASTING HACKS The frequency of a cricket’s chirps correlates with the air temperature in degrees fahrenheit. Just count the number of chirps in 15 seconds and add 37.
A five-day forecast can accurately predict the weather approximately 90% of the time.
Lowest Temperature Recorded on Earth: Vostok, Antarctica July 21, 1983
A 10-day—or longer— forecast is only right about 50% of the time.
90% PHOTOGRAPHS: (DEATH VALLEY, SEATTLE) SHUTTERSTOCK; (VOSTOK) WIKIPEDIA; (CARLIN) YOUTUBE
Highest Temperature Recorded on Earth: Death Valley, California July 10, 1913
Source: American Press Institute
Chicago got its name as the windy city in the late 19th century because of its hot-air, blustery politicians, not because of wind speed.
“Weather tonight: dark. Turning partly light by morning.” —George Carlin as Al Sleet, the Hippy Dippy Weatherman, 1966
Seattle isn’t the rainiest city in the United States, though it does have more days with rain than elsewhere AVERAGE ANNUAL RAINFALL Miami: 61.92” New York: 49.92” Seattle: 37.41”
Of 11 weather forecasting sources studied over seven years, three forecast time periods (1-3, 3-5 & 6-9 days) and 34.5 million forecasts, The Weather Channel was found the most accurate —ForecastWatch, 2017
august 2019 | luckbox
1. A pple cinema display that shows the /ES 24 hours a day 2. S tanding chair 3. B lue Bottle Coffee
4. A real hen named Michael Pollan who’s considered good luck.
6. S preadsheet of portfolio to keep track of positions, stop losses and orders
luckbox columnist The Technician Host tastytrade’s Trading the Close with Tim Knight Office Palo Alto, California Age Well over 30! Years trading Well over 30! Origin story as a trader I am a visual person. I can’t remember a person’s name, but I never forget a face. Likewise, with investments, I’ve never been into the numbers of statistics, but instead the big picture that they can represent. I started trading stocks and options early in my college years. I was doing it via charts from Day One, and I’ve been doing it ever since. Favorite trading strategy I’m not sure I would describe it as a strategy, but more of a way of doing things: I tend to trade a relatively large number of small positions, as opposed to just two or three. There have been times when I’ve had more than 100 positions going at once. There are a few things I do to make this feasible. First, I’m really organized with my
luckbox | august 2019
charts and how I group my watch lists into various opportunities; second, I have a spreadsheet that tracks every position, its relationship to my stoploss prices, and every position’s risk; third, and most important to me, I am religious about keeping my stop-loss prices fresh and updated. Managing risk is more important to me than exploiting opportunity, so I constantly stay on top of the charts and numbers in order to stay prudent. Average number of trades per day Ten to 20. I’m a swing trader at heart, so I’d much prefer just tending to positions as opposed to leaping in and out of them every day. I would say this is typical for me. The percentage of your outcomes that you attribute to luck Almost none. There have been times when I’ve been very lucky, and other times when I’ve been very unlucky due to some kind of “shock event” news that the charts couldn’t anticipate. On the whole, I’d say my outcomes were anchored in the analysis of the chart that I made in the first place.
5. L ogitech camera for the daily tastytrade show, Trading the Close
Best trade Sept. 19, 2008. It was an amazing day. Before the market opened, the government announced that it was banning the short-selling of financial stocks. There were hundreds of them on their list. The cool thing was that I was already heavily short and in position. When the market opened, equities absolutely exploded higher— in fact, the Russell 2000 hit the highest point in its history up to that time—but not long after, the market started absolutely falling to pieces. That was the beginning of the most crazyprofitable trading period of my life. Worst trade Sept. 1, 2010. It was following the weekend in which then Federal Reserve Chair Ben Bernanke pledged even more help from the Federal Reserve. Stocks went ripping higher that Monday, and that was the worst trading day of my entire life. I felt like crawling into bed at that point and never coming out. I lightened up considerably, licked my wounds and moved on. There’s really no other choice.
MARKET WIZARDS By Jack Schwager Publisher: HarperBus (1990) $19.59 (Amazon) Paperback (480 pages)
1987 AUGUST TOP IN STOCKS DÉJÀ VU By Susan Abbott Gidel
PHOTOGRAPHS: (STURGIS) PEEK CREATIVE COLLECTIVE/SHUTTERSTOCK.COM; (BURNING MAN) FLICKR/DANIEL HARTWIG
hen the S&P 500 topped on Aug. 25, 1987, at 337.89, five of 10 planets were traveling together in the sky in the sign of Virgo—all of them directly opposite three important celestial bodies in Pisces (the Sun, Venus, Mercury). That happens again—for the first time since then—on Aug. 30, 2019. What’s more, in 1987, transiting Saturn was exactly aligned with the placement of Saturn from the 1957 S&P 500 horoscope (see image). In 2019, the horoscope charts look almost identical. The question is whether history will repeat. The Crash of 1987 came on Oct. 19, when the S&P 500 lost 60 points (21%) on the day. From the 1982 bottom at 102 to the 1987 top at 337, the S&P 500 corrected 51% in less than two months. This year, Oct. 24 and Nov. 24 are dates to watch for a similar market-crash astrological setup. Susan Abbott Gidel, author of Trading In Sync With Commodities—Introducing Astrology To Your Financial Toolbox, also edits Red Letter Trading Days, a monthly newsletter.
Will history repeat?
A U GU ST 1–4 Lollapalooza Chicago 2–11 Sturgis Motorcycle Rally Sturgis, SD 5 Gann Day Change in Trend 15–17 Moneyshow* San Francisco 16–18 Woodstock Watkins Glen, NY 17–18 Chicago Air and Water Show Chicago 20–25 The International 2019– DOTA 2 Championship Shanghai 22 Trader Appreciation Day All options & stocks trades free at tastyworks 23–9/1 Chicago Jazz Festival Chicago 24 Futures Symposium* New York
25–9/2 Burning Man Festival Black Rock City, NV 29–30 FiNext Awards & Conference Orlando, FL 30 New Moon in Virgo S&P 1987 top déjà vu *For more information visit tastytrade (events)
august 2019 | luckbox
(Weâ€™ll put up $5,000 to see.)
ENTER NOW AT tastyworks.com/challenge Full terms and conditions at tastyworks.com/challenge. tastyworks, Inc. (â€œtastyworksâ€?) is a registered broker-dealer and member of FINRA, NFA, and SIPC. Trading Challenge accounts are not actual brokerage accounts. Trading Challenge trades are conducted in a simulated environment. tastyworks does not guarantee against losses for real trades placed in an actual tastyworks brokerage account. Allowable products and strategies available to Trading Challenge participants may not be suitable for all investors. Please consider your own risk profile and trading needs before trading in a real brokerage account. tastyworks does not make trade re recommendations, and the ability to trade certain products during the Trading Challenge does not constitute a recommendation or endorsement of any kind. Must be 18 years or older to participate.
7/12/19 3:24 PM
trades actionable trading ideas
LIGHT THIS CANDLE
CA N D L EST I C K C H ART ANALYS IS FO R INT ER M EDIAT E-T ER M T RADING
CGC: High Volume Trade By Doug Busch anopy Growth (CGC) trades an average of $162 million worth of stock a day (see pg. 50). This figure provides a good way of judging the market’s interest in a particular stock. This marijuana play has been higher by 42% yearto-date and 29% during the last year, yet it’s now trading 36% off of its most recent 52-week highs. Removal of Canopy Growth CEO Bruce Linton made news recently. Major investor Constellation Brands invested C$5 billion in Canopy Growth last August, but the results haven’t impressed, sending the stock down below $40. Low sentiment here could offer a buying opportunity, albeit with a tight stop. Trading into recent bullish candlesticks is shown on the chart.
Douglas Busch, CMT, trades U.S. equities using technical analysis with an emphasis on Japanese candlesticks. @chartsmarter
Canopy Growth (CGC)
BUY STOP $36
august 2019 | luckbox
R I PE & J U I CY T RA D E I D E AS
The Top Cannabis Stocks By Michael Rechenthin
ith legalization of pot gaining traction across the country, it’s no surprise that cannabis stocks are becoming more popular. The list of publicly traded cannabis companies below is sorted according to the amount of stock traded daily. For example, Canopy Growth (CGC) trades an average of $162 million daily (see Light this Candle, pg. 49). All of the ticker symbols mentioned here are considered cannabis stocks, which is actually more difficult to quantify than it may seem.
The average healthcare stock has an implied volatility of 14%. The average pot stock has an implied volatility of 66%
Some companies like Canopy Growth, Tilray (TLRY) and Cronos Group (CRON) are directly related to the cannabis industry and therefore make the list. Other companies, such as AbbVie (ABBV), didn’t make the list, even though they appear in other cannabis-related lists. For example, AbbVie markets Marinol—synthetic cannabis that combats weight loss and vomiting in chemo patients and patients with AIDS. While it offers that and other cannabinoid receptor drugs, it’s too much of a stretch to count it as a “pot stock.” Several things stand out with these companies: Negative earnings. Most cannabis stocks haven’t made money yet, as shown in negative price-to-earnings (P/E) ratios. Small companies. Many just aren’t as big as more mainstream companies. High implied volatilities. The average
healthcare stock has an implied volatility of 14%. The average pot stock has an implied volatility of 66%. That means the average pot stock has an expected daily volatility nearly five times greater. The market is placing a ton of risk on these stocks—caveat emptor. But with the right strategy, luckbox feels OK with high volatility. Instead of buying the stock outright, consider selling the at-the-money put or buy the stock along with a short-call. That may provide more room to be wrong and therefore a high probability of success. Michael Rechenthin, Ph.D., (aka “Dr. Data”) is head of research and data science at tastytrade.
To sign up for free cherry picks and daily market insights, visit tastytrade.com
Roll call This list of cannabis sector stocks is sorted according to the amount traded daily, which provides a good way to judge the market’s interest in a stock. Symbol
July Market Capitalization (Billions)
Canopy Growth Corp
Cronos Group Inc.
Aurora Cannabis Inc.
Gw Pharmaceuticals Plc
Zynerba Pharmaceuticals Inc.
New Age Beverages Corp.
CannTrust Holdings Inc.
Corbus Pharmaceuticals Holdings Inc.
22nd Century Group Inc.
luckbox | august 2019
Average Daily Notional Traded Volume
D ECO NST RUCT ING T HE P ROACT IV E T RADER’S B EST FRI EN D
The Changing Tickers of Volatility By Tom Preston
he late, lamented VXX—a volatility product that provided exposure to changes in the Cboe VIX Index through near-term VIX futures contracts—was one of the most actively traded exchange-traded notes (ETNs). Investors who thought market volatility might go up or down could buy or short shares of VXX—VXX RIP. It was supposed to be simple. But the operative word is “was.” In January, the VXX portfolio was liquidated and the product delisted by its issuer, Barclays. Why? It was not due to lack of popularity, which is what kills most new trading products. It was a structural problem with the VXX itself. To replicate the performance of the market’s volatility (i.e., the Cboe’s VIX Index), VXX held a portfolio of VIX futures (/VX). The reason is that it’s not possible to buy the VIX directly, and not practical to replicate the VIX Index with a portfolio of SPX options. /VX futures are actively traded, so it made sense to buy them in the VXX portfolio. The problem with /VX futures, as far as the VXX was designed, is that they expire. For the VXX not to expire right along with the /VX futures, it had to roll them from one expiration to another. At any one time, then, the VXX was comprised of /VX futures in the front-month expiration and /VX futures in the second expiration.
For investors who think the new VXX will suffer the same fate as the old VXX, a consistent bearish strategy could be profitable
When the front-month /VX futures expired and the next /VX futures became the front month, the VXX portfolio was 100% in that new front-month future. Every day after, the VXX would roll about 4% of its front-month /VX futures to the next expiration. For example, on the first day that the September /VX futures became the front month, the VXX would be 100% in the September / VX futures. The next day and every day after, VXX would sell some of its September /VX futures and buy an equivalent number of October /VX futures. By doing so, when the September /VX futures had expired, the VXX portfolio would be 100% in October /VX. That way, VXX always had /VX futures in its portfolio. But here’s the problem: Most of the time, the second month /VX futures is in contango to (higher than) the front-month /VX futures. The September /VX futures might be 16.00, and the October /VX futures might be 16.75. When the VXX rolled its September /VX to October, it would lose that .75 difference. When the contango was steep, the VXX lost more money on each roll. Sometimes the /VX futures were in backwardation, with the front-month /VX trading over the nextmonth /VX. In that case, the VXX would make money from that roll. But the /VX futures were never in backwardation very
often or for very long. That loss from the daily roll when the /VX futures were in contango dragged on the VXX’s price. The VXX dropped so steadily over time that it had five 1:4 reverse splits in its life to keep its price from getting too low. But this decline in price was never going to end, and when the VXX’s actual charter expired 10 years after its creation in 2009, Barclays closed it down. From a trading standpoint, the VXX was a great short because its price just kept sinking except for a few rare occasions when volatility spiked and took VXX with it. That’s why it was best to use defined risk bearish strategies in VXX as opposed to shorting its shares. But shortly after VXX’s demise, Barclays created a new ETN, VXXB, to replace it. While it differs in a couple ways, the main difference is that VXXB matures in 30 years, not 10 years. However, its portfolio is still comprised of /VX futures, and it hasn’t escaped that drag from its rolling process. And if that weren’t enough, Barclays changed the name of the VXXB to VXX in May. So, VXX is back, as are its options! And for traders who think the new VXX will suffer the same fate as the old VXX (and particularly if they understand why), a consistent bearish strategy could be profitable over time. Just keep the trade small and with defined risk.
august 2019 | luckbox
A V E T E RA N T RA D E R TAC K LES T EC HNICALS
Medical Drama By Tim Knight
ne sector of the U.S. equity market that’s well populated by heavily traded and dynamic securities is healthcare. However, the fact that these financial instruments reside in the same sector doesn’t make them identical. Stocks, like people, are characterized by different personalities, and stocks in the medical field are no different. In spite of the wide range of “personalities” among different medical corporations, investors can group company tickers into subsets based on behavior. Let’s assign these groups metaphorically to three familiar hospital locations: the emergency room, the waiting room and the surgical theatre. To be clear, these whimsical group names have nothing to do with goods or services the corporations provide. Instead, they are shorthand ways of expressing the general personality of these ticker groups. All of these stocks were identified as related to medicine by the Sectors function of the SlopeCharts website. The lists were filtered based on price and volume to ensure that no thinly traded issues would make the cut.
Never a dull moment This stock has gone from triple digits to single digits and back again.
EHC UHS MD The emergency room Stocks in the emergency room group are characterized by high drama—their wild and dynamic swings. They are the kinds of securities that occasionally have periods of extremely high volatility. Three tickers in this group: THC: Tenet Healthcare operates acute-care hospitals that include ambulatory surgery centers, diagnostic imaging centers and urgent care centers across the United States. AMED: Amedisys provides home health services to the chronic, co-morbid, aging American population through its home health, hospice and personal care. EHC: Encompass Health Corp. provides postacute healthcare services through inpatient rehabilitation hospitals, home health and hospice agencies. The featured chart from this group is EHC,
luckbox | august 2019
and a quick glance shows how powerful the up and down moves have been. The stock has gone from triple digits to single digits and back again, and very few periods in this multi-decade chart could be described as dull. See “Never a dull moment,” above. The waiting room In clear contrast to the “emergency room” stocks, those in the “waiting room” are slow, steady and generally “buy and hold forever” kinds of issues. Options traders would certainly want to consider a different kind of strategy with this class of stocks, because volatility tends to be low and the direction tends to be plodding steadily higher. UHS: Universal Health Services owns and operates acute care hospitals, behavior health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. DGX: Quest Diagnostics provides diagnos-
Stocks, like people, are characterized by different personalities, and stocks in the medical field are no different
tic testing, information and services to insurers and healthcare information technology businesses. HCSG: Healthcare Services Group provides management, administrative and operating expertise to the housekeeping, laundry, facility maintenance and dietary service departments of the healthcare industry. The representative ticker shown in the chart, UHS, has climbed thousands of percentage points since 1990. It has not been immune to market downturns, but as the chart shows in “Keeps going strong,” right, the devastating financial crisis of 2008 was hardly a “blip” in the long-term trend of this security. It has moved resolutely from the realm of penny stocks up to triple-digits. The surgical theatre The behavior of a third group falls between the extremes of the first two. Stocks in the “surgical theatre” are neither wildly dynamic nor steady climbers. Instead, they tend to be the kind of stocks that swing traders prefer, participating actively in sustainable up and down markets that trend well over longer periods. MD: Mednax provides physician services that include newborn, anesthesia, material-fetal, pediatric cardiology and other pediatric subspecialty care. ACHC: Acadia Healthcare operates mental healthcare facilities that address behavioral abnormalities in psychiatric facilities, substance abuse facilities and residential treatment centers. LH: Laboratory Corporation of America engages in end-toend drug development services. The chosen stock from this group depicted in “Top of the field,” right, is MD, which has an especially interesting analog pattern. Note the rounded top spanning 2005-2007, preceding one of the worst falls in the history of the company. Likewise, notice the similar, although much larger, rounded top that has completed in recent years. If past behavior indicates future results, this suggests a substantial drop in prices for this security, which already seems to be transpiring.
Keeps going strong This stock has not been immune to market downturns, but as the chart shows, the devastating financial crisis of 2008 was hardly a “blip” in its long-term trend.
Top of the field If past behavior indicates future results, expect a substantial drop in prices for this security, which already seems to be transpiring.
Stocks in the “emergency room” create high drama with their wild and dynamic swings
Different strategies should be applied to different personalities of stocks. The more history a given instrument has, the more evidence you will have as to its nature and its past behavior (which, in turn, should inform you as to likely subsequent moves, given its reactions in the past). When you are trying to winnow down opportunities in a particular
sector, it is helpful to tease out which stocks seem to have similar natures with one another, since that, in turn, can help you understand how that cohort behaves. Tim Knight has been using technical analysis to trade the markets for 30 years. He founded Prophet Financial Systems and offers free access to his charting platform at slopecharts.com.
august 2019 | luckbox
ACT I O N A BL E GLO BA L D I R ECT IO NAL T R ENDS
Trading Around Uncertainty By Amelia Bourdeau
ome financial media experts say that all trading and investing is uncertain by nature. Therefore, why should uncertainty in the markets matter? Well, while there’s some truth to this sentiment, it’s too simplistic. Specific types of uncertainty can directly affect market conditions. While they’re not always easy to anticipate, traders can remain vigilant to help mitigate them. External shocks are unexpected changes or announcements that impact the economy and financial markets and originate from outside of them. Recent examples include President Trump’s trade war tweets. He announced tariffs via Twitter (TWTR) on Chinese and Mexican goods on May 5 and May 30, respectively, blindsiding market participants. On June 7, Trump announced that Mexico tariffs were suspended. External shocks in the form of announcements outside of presidential tweets are known on trading floors as “headline bombs.” Recently, European Central Bank (ECB) President Mario Draghi delivered an external shock—on June 18 he made dovish comments that suddenly sent the euro lower versus the U.S. dollar. Events with binary outcomes also heighten market tension and raise volatility around the event. Examples include the June 23, 2016 Brexit referendum and the June 2019 Federal Reserve Board meeting. The Brexit referendum was a vote on whether the UK would stay in the European Union or leave. The stakes were high, and the exit polls made it
luckbox | august 2019
clear that the result would be close. The vote to leave the EU surprised financial markets. In the days following the outcome, the British pound/ U.S. dollar currency pair one-month implied volatility spiked to above 32; the VIX Index spiked to 26.7; and the British pound fell 11% versus the U.S. dollar. The prospect of rate cuts from the Federal Reserve at each meeting near-term is also an example of event risk with a binary outcome. The third type of uncertainty is prolonged uncertainty, which wears down financial markets. Market sentiment starts to sour over time and can begin to influence the real economy through lower confidence among
consumers and businesses. Equity market losses can reduce household wealth and consumer spending, and worsening business sentiment can cause a retrenchment in business investment and hiring. It’s more than three years since the UK voted to leave the EU, and still the it remains in the union without an arrangement to leave. The risk of a “hard” or no deal exit that had seemingly been removed in April is back on the table. GBP/USD has not returned to pre-referendum levels. The Bank of England (BoE) in its June 2019 monetary policy statement said, “Recent UK data have been volatile, in large part due to Brexit-related
Traders need an event risk roadmap
Presidential Tweet Storms Cause Market Volatility External shocks are unexpected changes or announcements that affect the economy and financial markets even though they originate outside them. Recent examples include trade war and tariff tweets by President Donald Trump.
effects on financial markets and businesses.” Importantly, the ongoing uncertainty of Brexit makes BoE’s policy-making uncertain as well— with the BoE saying, “The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.” On the unresolved trade war front, both the Fed and the ECB have cited weakness in global trade and global uncertainties as downside risks to their respective economies. How can traders mitigate these types of uncertainty? First, they need an event risk roadmap. One should have a sense of important upcoming dates for global macro events one to three months ahead. That can include G20 meetings, important central bank decision days, prominent speeches, and major economic and earnings releases. Note that before and during these events “headline bombs” occur and volatility rises. If prolonged uncertainty could
affect an economy, sector, or asset class, then develop a few outcome scenarios and trades to go with each scenario. Track developments on the specific uncertainty front to see which trading scenario will become most likely. Also, buy protection in terms of volatility or safe-haven assets. Times of prolonged uncertainty are prone to sudden volatility spikes. Keep a hedge position on in the form of a long VIX Index position, long gold, and/or long safe-haven currencies like the Japanese yen and the Swiss franc. Manage things as a trader during times of uncertainty. Keep a trading journal. Note trades with large gains or losses, keep track of market conditions and market events into and out of the trade. Note your mindset when entering and exiting the trade and the rationale for the trade at entry and exit points. Eventually, a pattern will emerge that shows which types of uncertain market conditions present the most difficulty for you. Prepare
for a sense of déjà vu with a market event and know how to handle it based on notes from the last time it happened. Amelia Bourdeau is CEO at marketcompassllc.com, an advisory firm that provides global macro education and trading strategy to investors at every level. @ameliabourdeau
Buy a 0.9545 • 3-month • USD/CHF put Investors who would rather stick with an ETF might consider FXF, the Invesco CurrencyShares Swiss Franc Trust. This ETF is equivalent to CHF/USD—so investors looking for USD/CHF to move lower should expect CHF/USD to move higher. Enter a long, covered call by buying 100 shares and then selling the first strike above the current stock price. Typically, that’s done in the following month. Investors buying the shares in August should consider the call in the September expiration. That can raise the probability of success around a trade and also lower the overall costs associated with the transaction because of the credit received.
QU I E T FOU N DAT I O N H E L PS P ROACT IV E INV ESTO RS U NDERSTAND T HEIR P ORTFOLI OS
Millennials are Overexposed to Cannabis By James Blakeway
cross the world of financial media one topic pops up repeatedly: “How are millennials saving and investing?” Born from 1981 to 1996, millennials have now reached ages 23 to 38. As baby boomers (1946-1964) retire and members of Generation X (1965-1980) become content with
their investing and savings habits, financial firms are shifting their focus to millennials for opportunity. One firm succeeding in this endeavor is Robinhood. Robinhood’s basic, intuitive mobile app, combined with its pricing, has secured the company a place with millennials over the last several years.
Perhaps the most interesting component of Robinhood is the “Top Stocks” list it displays to clients. It’s akin to the “Trending” topics on Twitter or top videos on YouTube, except it’s populated with the stocks that Robinhood customers, primarily first-time or novice millennials, are investing in at the firm. The table shows the Top
Robinhood’s Top 20 Robinhood’s Top Stocks list alerts customers to the most popular stocks, as measured by purchases of Robinhood customers Robinhood Top 20 (June 2018) Rank
Robinhood Top 20 (June 13, 2019) Rank
Market Cap ($billion) 7.7
Advanced Micro Devices
Advanced Micro Devices
Bank of America
luckbox | august 2019
20 stocks held by Robinhood customers in June 2018 and the more recent list from June 2019. A year ago, the list consisted of 20 well-known publicly traded corporations that were mainly household brand names. Interestingly, 14 of the 20 were S&P 500 components. However, these 20 stocks, in an equally weighted portfolio, have underperformed the S&P 500 during that period (-1.23% compared to 5.4%). Fast forward one year, and several companies were replaced in the June 2019 list, including Twitter (TWTR), Netflix (NFLX), Bank of America (BAC), Micron (MU), Square (SQ) and Starbucks (SBUX). Even more interesting are the companies that were added. Most notably, four of the six new stocks are in the marijuana industry. Of the four marijuana stocks, Aurora Cannabis was the only company with a positive net income in its last annual filing. It seems fair to assume this shift in interest is driven primarily by the constant presence of marijuana in financial and lifestyle news headlines. Additionally, this bet by millennials falls in line with a wider national acceptance of legalized marijuana, which was illustrated recently when the governor of Illinois signed a legalization bill into law. Millennials are likely hoping to be invested in the next Tilray (TLRY), a marijuana stock that surged from the mid-$20s up to $300 before crashing back into the $40 range. Analyzing an equally weighted portfolio of Robinhood’s June 2019 stocks with Quiet Foundation’s free portfolio assessment yields some interesting metrics and insight. Overall, the portfolio scored 65 (out of 100) indicating it’s “On
65: On Track
Of the four marijuana stocks on the Top 20 list, only No. 1-rated Aurora Cannabis posted a positive net income in its last annual filing
Track.” The report commended the portfolio’s inclusion of only liquid stocks, the majority of which have liquid options markets, potentially enabling investors to enhance long positions with short calls. A metric where the portfolio falls short—receiving the lowest possible score—is recent performance relative to the overall stock market. These combined stocks saw a 3.4% loss compared to a 2.5% gain in the S&P 500 during the prior three-month period. The S&P 500 returned this gain with a 14.9% volatility, versus 49.8% for the portfolio’s loss. Of course, this “On Track” score is awarded with the assumption of an equally weighted portfolio across all 20 stocks. Because of the expense of several of these stocks, especially Amazon (AMZN), it’s probably safe to assume that most millennials do not hold this equally weighted portfolio. It would require a minimum of $37,000, likely above the average millennial brokerage account budget, and far above the widely estimated $3,000 average account size for a Robinhood client. It’s far more likely that a millennial’s account
would consist of one or two of the marijuana stocks or, in some cases, it might be fully invested in a single share of Amazon. By focusing on “Top Stocks,” millennials may fall into the age-old trap of over-concentration and diversification. As an example, investors interested in marijuana stocks may be better served by investigating products such as the ETFMG Alternative Harvest ETF (MJ). This fund is invested in 40 marijuana companies, significantly lowering specific stock risk. Anyway, Robinhood has done something impressive: It persuaded a large number of millennials to become interested in investing. However, it’s now the mission of educational finance platforms like tastytrade and Quiet Foundation to take that education a step farther by opening millennials’ eyes to thoughtful diversification, risk management and strategy.
James Blakeway is CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides fee-free investment analysis services for self-directed investors.
Past performance is no guarantee of future results. Information provided in an EPI Report does not consider the specific profile, objectives or circumstances of any particular investor or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her investment professional. Investment suitability must be independently determined for each individual investor. QF does not make suitability determinations or investment recommendations for investors. EPI utilizes the S&P 500 as its benchmark given that the S&P 500 is considered a barometer of stock performance in the United States. Aspects of the analysis and information found in an EPI Report are based upon simulated and/or hypothetical performance. Simulated and hypothetical performance have inherent limitations and do not represent the actual performance results of any particular investment products. The EPI Report does not guarantee any results or outcomes in the financial markets. Investors should be aware of the methodology used to produce an EPI Report and the inherent limitations when placing reliance on the results. For additional information about EPI Reports, visit the QF website: quietfoundation.com.
august 2019 | luckbox
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6/23/17 12:39 PM 7/12/19 12:58 PM
SPECIAL SECTION luckbox is devoting this month’s tactics section to a special three-part series on stop losses, courtesy of the Learn Center @tastytrade
tactics essential trading strategies
Stop Losses Stop loss orders can help manage a position’s profits and losses By Kai Zeng & Michael Gough
ot many traders have the time to monitor their portfolios constantly and close positions when the market moves against them. So what can they do to prevent the detrimental effects of an outsized move on a position’s profit and loss (P&L)? They can manage trades with the help of the stop-loss order—a standing order that closes the trade when the losses in a position exceed a predefined amount. This type of closing order allows traders to rest easy knowing that if they step away from the screen, their losses won’t exceed a certain dollar figure if the underlying experiences a black swan event. Stop-loss orders have gained great popularity with stock traders because of the outsized moves in single name equities. But what prevents options traders from using these orders? After all, naked short options can assume large losses because of their inherent leverage. Let’s compare the performance of two short options management strategies. In the first case, the short options are simply held to expiration. In the second, the short options are managed when losses equal the amount of the credit initially received, just like a stop loss. For example, if the option is sold for $1, the stop-loss order kicks in when the option is trading for $2. The parameters of the back-test are as follows:
Data Date: 2005 through 2019 Underlying Asset: SPY Option Delta: 50 (At-the-Money) Approximate Days to Expiration: 30 Number of Occurrences: 3,400 Using 15 years of data in this backtest makes it possible to incorporate lots of market events, including the Great Recession, Flash Crash and Post-Election Rally. SPY is used as the underlying security because of its deep liquidity, robust options markets and depth of market data. The 50-delta put option is used because it is a higher probability trade with a lower buying power requirement than buying and holding stock. Additionally, the short put generates positive theta decay. The first question is whether stop losses effectively reduce large losses for options sellers. As seen in “Stop It,” right, incorporating a stop loss can reduce large losses! Compared to holding to expiration, using a stop loss reduces losers by 42%. Does that imply traders should incorporate stop losses for all of their trades? No, traders should also consider profitability. Although stop losses can help traders sleep well during a market meltdown by limited losses, their overall performance is worse than holding to expiration, as seen in “Limiting Losses,” right. Using a stop loss resulted in a lower win rate and a lower average P&L. Although not
Stop It Compared to holding to expiration, using a stop loss reduces losers by 42%. 50 Delta SPY Puts
No Stop Loss
1x Stop Loss
Limiting Losses Using a stop loss resulted in a lower win rate and a lower average profit and loss. 50 Delta SPY Puts
No Stop Loss
2x Stop Loss
included here, these performance trends persist across varying assets and different delta put options.
While options traders can limit losses with stop-loss orders they should be aware of the potential lower average P&L and win rate. As with most trading decisions, there are trade-offs. If traders prioritize mitigating losses, they can use stop losses. However, if per-trade P&L becomes the priority, they may want to consider other management techniques. Kai Zeng, an active derivatives trader for more than 10 years, works as a data scientist and derivatives strategist at tasytrade. Michael Gough, a self-taught coder who became an options trader, serves as co-host of tastytrade’s Research Specials Live.
tastytrade teaches how to manage losing options trades
august 2019 | luckbox
Stop Profits Yes. It’s a thing. Traders can limit the potential for large losses while maintaining, and even improving, profitability By Kai Zeng & Michael Gough
hat’s more important: trade entry or trade exit? As experienced traders know, both are integral to a trader’s profits! Stop Losses, the Basic Tactics article in this issue on page 59, tests the viability of incorporating stop losses into short option trades to limit large losses. This management strategy successfully reduces large losses; but it also reduces the profitability and win rate of short puts. Can traders do anything to limit the potential for large losses while maintaining or improving profitability? How about a stop profit management strategy—the opposite of a stop loss? Instead of closing trades based on a loss amount, it closes trades at a pre-defined profit level. Options traders can use this strategy seamlessly because max profits are defined at trade entry. A put option sold for $500 can never make more than $500, thus a profit-taking strategy can be set as a percentage of the potential max profit. For example, a 50% stop profit on a put sold for $500 would execute when the profit is $250. Using the back-testing framework from “Stop Losses,” let’s compare the performance of holding the short puts to expiration, incorporating a 1x stop loss and managing at 50% of the potential max profit. The back-testing framework is as follows: Data Date: 2005 through 2019 Underlying Asset: SPY Approximate Option Delta: 50 (At-the-Money) Approximate Days to Expiration: 30
luckbox | august 2019
Taking money off the table improves profits and reduces risk Managed Short Puts at 50% Potential Max Profit Number of Occurrences: 3,400 As seen in “The Results,” (pg. 61) managing short puts at 50% of the potential max profit greatly improves the win rate by locking in small winners before they turn into losers. But trading isn’t all about win rates. Win rates can be misleading if large losses wipe out the gains of
small winners. It’s important to also consider profitability. One way to measure profitability is annualized return on capital (ROC). Annualized ROC explains how much return a trader can expect to make for a given amount of capital deployed and normalizes based on differences in trade duration. As seen in “Best ROC” (pg. 61), managing short puts at 50% of the potential max profit provides the
greatest annualized ROC. Wait a minute, some may suggest. How can the strategy that “leaves money on the table” provide the greatest ROC? Managing at 50% of the potential max profit yields the greatest ROC because of the high number of winning trades and the reduced trade duration, which prevents profitable trades from turning unprofitable before expiration. Because stop losses prevent large losers and profit taking increases annualized ROC, is it viable to incorporate both management strategies? The table “Managing Losers & Winners,” right, combines stop losses and the profit-taking results in the best performance and compares them to holding short puts to expiration. Managing both losers and winners improves profitability, maintains the same win rate and reduces large losers. Although seemingly counterintuitive, taking money off the table improves profits and reduces risk. Profitable trading demands attention to both entry and exit. The cumulative results of a portfolio employing these strategies can be seen in “Outperformer,” right, which shows that the portfolio incorporating stop losses and profit taking outperforms the portfolio that only incorporates stop losses. Although contradictory to the conventional financial advice of letting profits run, an active profit-taking strategy in conjunction with stop losses greatly improve a portfolio’s risk and return profile.
The Results Managing short puts at 50% of the potential max profit greatly improves the win rate by locking in small winners before they turn into losers. 50 Delta SPY Puts
Held to Expiration
Best ROC Managing short puts at 50% of the potential max profit provides the greatest annualized ROC. 50 Delta SPY Puts
Held to Expiration
Managing Losers & Winners Managing both losers and winners improves profitability, maintains the same win rate and reduces large losers. 50 Delta SPY Puts
Held to Expiration
Stop Loss & Profit Taking
Outperformer A portfolio incorporating stop losses and profit-taking outperforms the portfolio that only incorporates stop losses.
Kai Zeng, an active derivatives trader for more than 10 years, works as a data scientist and derivatives strategist at tasytrade. Michael Gough, a self-taught coder who became an options trader, serves as co-host of tastytrade’s Research Specials Live.
Counterintuitively, traders tend to come out ahead by using the stop profit, which closes trades when they reach a predetermined level of profit. august 2019 | luckbox
Fine-Tuning Stop Losses Parts I and II in this series made the case for stop losses in options trading … and stop profits. To use stops well, it’s critical to understand how to determine the optimal stop-loss level By Kai Zeng
n this issue of luckbox, the Tactics section explores stop losses. The Basic article, Stop Losses (pg. 59), tests using stop losses in short option trades, and the intermediate article, Stop Profits (Pg. 60), tests the performance of incorporating both stop losses and active management into a short options portfolio. The studies indicate that combining stop losses and profit taking tends to pay off by yielding greater average P&L and controlling large losses. Let’s take that research a step further by testing the performance of varying stop loss levels. The level of the stop loss can have a big impact on a portfolio’s performance, so this study will test a variety of stop losses. These types of stop losses are defined as tight and loose and each has pros and cons. Tight stop losses allow for only small losses, which results in lower portfolio volatility. Loose stop losses, on the other hand, may experience large losses but also give the trade more time to bounce back and become profitable, resulting in a higher win rate. Which strategy’s better? Let’s test the performance of varying stop losses by using the same back-testing framework used in the Basic and Intermediate articles of this Tactics series. Data Date: 2005 through 2019 Underlying Asset: SPY Approximate Option Delta: 50 (At-the-Money) Approximate Days to Expiration: 30 Managed Short Puts at 50% Potential Max Profit Managed Tight Stop Losses at 25%, 50% and 75% of the Premium Received Managed Loose Stop Losses at 100%, 200% and 300% of the Premium Received Number of Occurrences: 3,400 Tight stop losses mean that if the original
luckbox | august 2019
Stop Loss Performance All of the stop losses reduced the largest loss when compared to holding the trade to expiration. This shouldn’t be much of a surprise. Note: The largest loss numbers are the same for tight control targets because the database uses end-of-day data. Tight Targets
Held to Expiration
Stop Loss with Profit Taking Performance Adding a proactive profit-taking strategy drastically improves the performance of all six strategies. Tight Targets + 50% Profit Taking Loose Targets + 50% Profit Taking Annualized ROC Win Rate Largest Loss
short put collects $5 in credit and the max profit is $500, the stop loss will kick in when the losses reach $125, $250 and $375, respectively. Loose stop losses mean that the same short put will close when losses reach $500, $1,000 and $1,500, respectively. As in the previous two studies, this analysis examines the annualized return on capital (ROC), win rate and largest loss of each management strategy. The annualized ROC explains how much return a trader can expect to make for a given amount of capital deployed. Win rate describes the portion of
When managing losses at 25% of the option price, the probability of being profitable is only 42%—worse than the odds at a casino roulette table.
Tight Stop Loss Performance The combination portfolio of managing tight losers and winners provides a greater cumulative portfolio performance than just managing losers no matter the stop-loss amount.
Loose Stop Loss Performance Incorporating active loss and profit management results in greater cumulative performance.
trades that were profitable, and the largest loss is a measure of risk that highlights the worst performing trade’s P&L. As seen in “Stop-Loss Performance,” (pg. 62) all of the stop losses reduced the largest loss when compared to holding the trade to expiration. This shouldn’t be much of a surprise. More surprising, however, are the changes in the ROC and the win rate. Although incorporating stop losses reduced the largest losses when compared to holding to expiration, it did so at the expense of a lower ROC and win rate. The tighter the loss control, the lower the
win rate. This matches the original assumption that looser stop losses allow more time for trades to become profitable. When managing losses at 25% of the option price, the probability of being profitable is only 42%—worse than the odds at a casino roulette table. Additionally, the ROC is worse than holding the trade to expiration when traders don’t apply any management! On the other hand, the loose stop loss at 300% only marginally reduces the largest loss but sacrifices 300 basis points in the ROC. There is a clear dilemma in using these stop losses:
T ightening the stop loss increases the number of the unprofitable trades, which directly hurts the annualized ROC. Loosening the stop loss increases the win rate and ROC but ultimately defeats the point of incorporating a stop loss because losses are similar to just holding to expiration. The analysis in the Intermediate article, Stop Profits (pg. 60), of this series indicates that to achieve greater performance it’s important not only to manage losses but also to manage winning trades proactively. How might the performance change for these tight and loose stop losses if a trader also incorporates a profit-taking strategy? In this piece, profits will be managed at 50%. For example, a short put sold for $5 will be closed when the profits are $250. As seen in “Stop Loss with Profit Taking Performance” (pg. 62), adding a proactive profit-taking strategy drastically improves the performance of all six management strategies. Managing losers and winners has a positive impact on both the annualized ROC and the win rate. These performances can be evaluated by comparing the long-term portfolio performance of each strategy. This performance is evaluated by holding one contract continuously since 2005. As seen in “Tight Stop Loss Performance,” left, the combination portfolio of managing tight losers and winners provides a greater cumulative portfolio performance than just managing losers, no matter the stop-loss amount. The same trend persists for loose stop losses; incorporating active loss and profit management results in greater cumulative performance. (See “Loose Stop-Loss Performance,” left.) Adding a profit-taking component to stop losses results in consistently greater performance in the long run. Additionally, comparing the two types of stop losses, tight and loose, one sees that looser stop losses result in greater cumulative performance than their narrow counterparts. Kai Zeng, an active derivatives trader for more than 10 years, works as a data scientist and derivatives strategist at tasytrade.
tastytrade teaches how to manage losing options trades
august 2019 | luckbox
luckbox of the month
CHUCK MILLER’S LUCKY (SECOND) HOLE IN ONE By Jessica Christoffer
American golfers play
450 million rounds each year
128,000 holes in one are scored each year of hole-in-one golfers are age 50 or older
luckbox | august 2019
straight as an arrow!” It was Miller’s second ace, on hole 17, that earned his luckbox designation. Again, with a 6-iron, shooting 138-yards toward a downhill, par-three, this tee shot was drastically different, and the luckbox outcome was undeserved, by Miller’s own admission. “It was a miracle the fluke shot even made it in the hole,” he said. “It wasn’t pretty but still only showed ‘one’ on the scorecard.” For a golfer who plays nearly 70 rounds a year (managing to shoot his age only three days earlier), securing a second career ace was far from unique. That lucky third ace was the outlier. The National Hole in One Registry puts the odds of a left-handed, 81-year old golfer notching two aces about one hour apart in the same round at about 69 million to one.
Average handicap of hole in one golfers:
Odds of making a hole in one are
The odds of Chuck Miller’s two aces in one round
Most PGA Tour career holes in one: 10 Robert Allenby and Hal Sutton
Most holes in one scored by a pro: 51 Mancil Davis
Most holes in one scored by an amateur: 59 Norman Manley
PHOTOGRAPH COURTESY OF JOSHUA COOK / GHIDOTTI
efty golfer Chuck Miller made his first hole in one in 1974. Then in late June of this year, the 81-year-old amateur notched two more aces. The most thrilling part? Miller shot his second and third holes in one at Little Rock’s Cortez Golf Course in the same round—an exceedingly rare event. On the PGA Tour, only three professional golfers have ever shot two holes in one in the same round. Miller’s first hole in one in this year’s fateful round came off a 6-iron at the 135-yard, par three, 12th hole. The tee shot made the seven-decade (20-handicap) golfer proud. “If there had been a tracer like we see on the TV coverage of the shots pros make during tournaments, it would have shown a beautiful high shot that never varied in its trajectory from tee to green,” Miller told luckbox. “It was
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