From the Trader’s Desk: “Risk Management”, Episode 1 Season 2 of Billions

Welcome to “From the Trader’s Desk” for the 2nd Season of Billions! The original concept of these posts was to recap of 2-3 episodes from my point of view as a trader, and to help with any confusion with “fin speak”. However, “Risk Management” was so meaty; I had to dive right in. So now, without further ado….

”Trading is gambling, legalized gambling.”

source: Showtime

Those are words I spoke to Damianista on our first meeting. I think she asked me how I got into the financial industry, and I told her I loved to gamble, and found a way to do it legally.

How fitting then is it that we open Season 2 with Axe sitting at a racetrack! Now, I’ll admit, I didn’t know it was Yonkers Raceway. I thought it was Belmont Park, a place my grandfather would take me to as a kid. Axe tells Bach “this place made me”, and I totally understand.

My grandfather was a bookie. I grew up around betting and gambling my whole life. By the time I was in middle school, I knew all about points spreads, over/under and reverse bets. I knew you only bet a three team parlay if you were down from the early NFL games. By the time I was in high school, I was helping take the action, and betting as well. When Axe says he started looking at the board instead of the gate, “you figure out where the action is”, I knew exactly what he was talking about. My grandfather taught me when it came to betting baseball, you bet the pitcher, not the team. That’s a plan.  Axe knows that without a plan, your odds of winning diminish greatly. So what better place to set his plan in motion of taking down Chuck than at place where he learned you needed a plan to win?

It should not be a surprise that someone whose job it is to buy and sell stocks would have a background in gambling. You get that same rush when you take a position on a stock as you do when you place a bet on a team, in a casino, at the track etc. You’re putting your money down on something that you believe will win. In a way, it’s a reflection of you and your abilities. “I know everything I need to know about stock X”; “I know everything I need to know about team X”. Same plan. And when your team wins, or the stock you short starts to decline, that winning feeling is the same. Is it about the money? Partly. But it’s about being right, about the winning. And Axe is nothing if he is not winning.

I think it was also fitting that in the first episode of Season 2 we have Axe telling us basically that you need to know the players, not just the game. There is a similar scene between him, Danzig and Ben Kim in “Pilot”. The theme: Axe sees what others don’t.

Source: Showtime

When everyone is finally let back into Axe Capital, they are gathered in a conference room, and Axe goes all George Patton on them!

“The entire hedge fund industry is under siege”

I’d love to say Axe is wrong, but he’s not. The hedge fund industry is going through massive changes. The past few years have seen some of the biggest and best performing managers have terrible returns. The combination of low volume and low volatility in the market has made it harder and harder to produce returns similar to prior years. When you are on average, charging clients a 2% management fee, and taking 20% of their profits, you need have great performance.

Clients are now looking at alternative investments: quant funds, passive investing as opposed to active managing, or playing it safe and going to a long only fund. These types of investments have lower fees and more consistent returns, so the outflow of money into them is hitting the industry hard.

A few definitions before we move on (all definition are in our Billions: Glossary)

A quant fund is an investment fund that selects securities based on quantitative analysis. In a quant fund, the managers build computer-based models to determine whether an investment is attractive. In a pure “quant shop” the final decision to buy or sell is made by the model. Axe Capital is more of a fundamental shop. They research companies and make trading decisions based on the fundamentals of the company (potential revenue and earnings growth, management, etc.). I trade a quant strategy, a fundamental strategy, and a hybrid of both.

Passive management vs. active management: passive management is when your investment goal is to mimic the performance of certain index, where as in active management your goal is to outperform the index. A passive approach is safer, and costs less, but you will never outperform the index. The reason active managers charge high fees is because you are paying for their expertise (and analysts) in order to get higher returns.

Source: Showtime

“Trust almost killed Axe Capital” and Axe will not let that happen again, hence all the crazy new security and crazy new rules. But, in any relationship, if you don’t have trust, what exactly do you have? I also wonder, was that “I will avoid my fate” speech more for the employees or for him? I did see a bit of Henry VIII in that scene, and not in a good way.

Source: Showtime

With the King in war mode, well who better than good old Wags to try and get some fresh ideas from the troops? (As an aside here, I have to say, I want to hate Wags, but I just can’t. That pinky ring was everything this week!). The poor analysts: buy an algorithm? No! Go to cash? No! I’ll build a model! NO! This scene was funny to me since those are the same tired, old, conservative ideas you consider when you are in a defensive position. Axe wants new, fresh and certainly aggressive ideas!

Zero Cost Collar. What? Yes, I know. Everyone except me (and other Wall Street types) all thought the same thing “what the hell is that?” That is what I’m here for! When things get in the weeds when it comes to “fin speak” I’m your girl!

source: Showtime

Mafee needs to sell 5M shares of a stock, and he needs to get $40 a share. He tells Taylor it trades “by appointment”, which means that it is a low volume stock. If you sell too many shares at the same time and flood the market on a low volume stock, you will put pressure on it, and the price will decline. Mafee has come up with the plan to sell 1M shares with 5 different brokers (who don’t know about each other). Taylor knows that is not the best plan. It will be obvious to the brokers what’s going on, and will payback Mafee one way or another in the future.

Taylor suggests a zero cost collar strategy. This means that to protect the downside of your trade, you would buy puts (a put allows you to sell a specified amount of an underlying security at a specified price within a specified time.) and sell calls (a call allows you to buy a specified amount of an underlying security at a specified price within a specified time). It’s zero cost due to the fact that the price you pay for the put will be the exact same price you sell the call. It’s not mentioned how much the options would cost in this case (option prices vary depending on how close the strike price is to the current price and how close or far the option is), but let’s say the $40 puts Taylor suggests to buy are $1.00. Mafee needs to sell $45 calls for the exact amount, $1.00. Zero Cost!

It’s a basic way to protect any downside, as options are used like insurance. Now Mafee can take his time in selling the shares at the price he wants, not put pressure on the stock, and not piss off any of his brokers!

Now to the trained ear, I had a bunch of questions: What is the current price of the stock? What time frame are the options (month, week, etc). I’m going guess it would have made it even more confusing if Taylor had gone into more detail, but I wanted more!! 🙂

You may ask, “Mafee works at Axe Capital. Why is an intern telling him this basic strategy?” At first I thought the same thing. In reality, Mafee would have passed that order over to his trading desk, where someone whose job it is to trade stocks would have executed the trade. Also, Mafee is an analyst/portfolio manager. His job is to pick stocks based on his research. He probably knows the strategy; it just doesn’t come to mind at that time because it’s not his focus.

I do think this was a nice way to introduce Taylor (I can say this now, knowing what I know from seeing Episode 2 at a screening last week). I had read that Taylor was “brilliant”, and was slightly disappointed when I saw a basic options strategy as the evidence. But I’m proven wrong (save that because you won’t see it a lot!) in the next episode. This Lady Trader loves Taylor.

I applaud the writers for having the guts to bring in a gender non-conforming character (and actor) into the boys’ club that is the hedge fund world. We see Mafee accepts Taylor and values their insight. We know Axe eventually does as well. But can you see Dollar Bill being so tolerant? Wags? I really do hope the writers explore some of the issues a person who is different from what some think is the “norm” will have and how they react and deal with them. As a 17 year old, blonde girl wanting to work on Wall Street, I knew what it is like to have to deal with sexism. My approach was two-fold: 1. Just work my ass off and prove my value, 2. Since I knew my way around sports and such, I could be thought of as “one of the guys” and be a bit more excepted. Things are much better now than they were back then (I could tell you stories!) but it’s not where it can be. Showing Taylor deal with this type of adversity, overcoming it and succeeding would send a very positive message!

source: Showtime

And finally, I have to give my 2-cents about the Axe-Wendy “session”. I know I’m in the minority, but I just don’t get why Axe feels he needs her! As we know,  young Axe at Yonkers Raceway learned to “figure it out”. I’m pretty sure that is way before he met Wendy. His decisions on 9/11? Again, before Wendy. Axe was Axe before he met her, and I just don’t understand why he feels the need to have her as a crutch. Not to mention the fact that I just don’t believe in the whole concept of a “performance coach”. I’ve been trading a long time, and yes there have been times I’ve felt I lost my “touch”. But you know what I do? Go for a run, listen to some Black Sabbath or Iron Maiden, and even step away from trading for a day. There are plenty of ways to get off the schneid. If you need someone to motivate you in this business, you’re in the wrong business. Just my opinion.

Random observations and musings:

The hedge fund manager Wendy gives a presentation for is Todd Krakow. This character reminds me of Martin Shkreli. Shkreli was a hedge fund manager and the CEO of a biotech firm called Retrophin, but is most recently notoriously known for raising the price of a drug the company bought from $1.50 to $30. He is currently awaiting trial after a federal indictment on running a Ponzi-like scheme. In other words, slime. They way he talks, the way he looks, even his height screams Shkreli. I may be wrong. Billions writers – am I close? 🙂


And finally, I cannot put into words how beautiful some of the shots of lower Manhattan have been on this episode. It’s the place I worked when I was first starting out, and it will always have special place in my heart!

Author: Lady Trader

"Lady Trader" is a Brooklyn girl, and a Wall Street lifer! Recently fought cancer, and won! I love heavy metal, history, sci-fi, oh, and blogging about Billions and it's great lead actor, Damian Lewis!

24 thoughts on “From the Trader’s Desk: “Risk Management”, Episode 1 Season 2 of Billions”

  1. Loved this entry Lady Trader, thank you. Firstly, I barely understood a tiny portion of what you wrote. Have never been in stocks or anything related to Wall Street personally. No one in my family has. I also don’t gamble, mostly because I never had the money to do so, but also because I don’t know how! (This is where I repeat, what I have said before, being a career military wife, I related to Homeland, not at all to Billions. But will watch anything that brings Damian into my living room.) However, I do understand how you understand! Does that make sense? The other thing and a big one for me, I shake my head at this performance coach business. When I was a beginning teacher, of course I had mentors, then spent a career going to workshops, etc. But if I wanted to get better at some skill I needed, I dug down deep inside myself to find a way to improve. Did not then and would not now want someone playing inside my head so to speak. Hope I am not offending anyone. This is just my opinion, but I was so glad to read I’m not the only one that questions this particular thread of the whole Billions story. Maggie S. is a skillful actress. I just wish she had been used in a different role.

    1. Thank you for your kind words Connie! And yes, I what you said does make sense! If make the non-financial people who watch the show because of their love of Damian Lewis, and good drama understand a bit more about the Wall Street world, I feel I have done my job! All of this is just second nature to me by now since I’ve been in this world since 1988! If there is ever anything you want explained, please just ask! That is what I’m here for!! And I’m so glad I have a least one other person who understands my feelings on Wendy!! And I agree with you on both points: Maggie S is a wonderful actress and you could never offend anyone with your opinion! We love to see everything from different points of view here on FanFun!

  2. We are so fortunate to have these three perspectives on the first episode of season two. Damianista, JaniaJania, and Lady Trader have given us layers of insight into the dramatic lines, the emotional lives of these compelling characters, the technical aspects of the workplace. Thank you for helping me see more than I could see by myself. I enjoyed the episode on first viewing, and now I appreciate it even more.

    1. Thank you so much for you words Lynda! I’m not a writer by trade (obviously) but hearing that I have helped someone see more of this wonderful show makes my day!! I agree with about the different perspectives: we each bring our life experiences and points of view when we write about Billions, and we all learn from each other! It’s a wonderful thing! If you ever have a question about “fin-speak” or anything on the show that is confusing about trading, please reach out to me. That is what I’m here for!!

  3. Wonderful post, partner! Since I had known for a while about your backstory for while I was like “WOW WOW WOW” when Axe said that it was the raceway that made him. It is not just that you understand how he does his business, but you also understand how he started. It’s kind of amazing! I LOVE IT! And you, my friend, are a wonderful role model for young women aspiring to get into business… You were 17 when you started and you made it… which brings me to your take on sexism in hedge-fund industry. Thank you so much! I believe most of the businesses, mine included, are still boys’ club even though there have been improvements. And, I completely agree with you it should be pretty challenging for a gender non-conforming individual to feel comfortable in this environment. As someone who believes in strong role models in popular culture, I applaud the way Billions uses the power of art to celebrate diversity. Way to go! And, hey, we all know it takes much more than “zero cost collar” (thank you for the wonderful example that makes the concept clear!) to impress Axe and so cannot wait to see much more of Taylor in the new season!

    Ah, and of course, I need to say a few things about Wendy, don’t I? 😀 😀 😀
    I am naturally not an expert on this but as far as I understand some big hedge funds have performance coaches. So they exist. I don’t have any idea about how much they contribute to a fund’s performance; but having said that, I don’t understand why performance coaching should be very different from regular psychotherapy. And I can easily say almost everyone around me, in very different lines of business, is seeing a therapist. Even though I have not seen one (I think I am still this old-school woman who relies on herself to get up when she is gets knocked down, and besides I have a strong support system at home), I understand people may need it. And companies that need high-performing employees may have an incentive to provide this service free of charge on the premises.

    In the context of Billions, which is, after all, great fiction, Wendy brings this very sensitive conflict of interest into the game that is so delicious to watch and her understanding of human psychology brings layers to the story. And I admit I am sold on the idea that Axe needs her, because he has never done it without her. It was Wendy that put him together after 9/11 and they have been together, in the trenches, for the last 15 years, and she has always been the one that kept the animal side of him grounded. I think Axe is scared of falling without her, and I kind of understand where he is coming from. Everyone needs a rock in her/his life. It could be a mother, a spouse, a sister, a friend. I think Axe’s rock is Wendy. I don’t think it is about performance between the two of them. It goes deeper than that. Oh yeah I just love this woman, don’t I? 😀

    1. Thank YOU partner for the kind words and for giving me the opportunity to write about things that I love and that are so integral to who I am! You have given me such a supportive platform to explore these things. And I cannot ever thank you enough.

      I must say, I’m thinking more and more that Axe and I were separated at birth! Although where the ginger came from, I’ll never know!!

      I’ve never felt like a role model, but I guess perhaps you are right. It was hard to try to be taken seriously, but once people see your value, the rest does not matter. Which is why Axe doesn’t care what (if any) gender Taylor is; he sees their value, and that is what matter to him. Taylor is smart, but I think they will learn a thing or two from Axe!!

      And I love that we disagree about Wendy. The performance coach thing is relatively new (last 10 years maybe, but since I’ve been doing this forever, yes 10 years is new!!). And I guess I do understand why some can benefit from it. I just don’t think Axe is one of them. Ben Kim? Yes. I

      I do appreciate the role Wendy plays in the grand scheme of the chess board that is Billions. And I do love Maggie S acting. I guess I just think Axe is a warrior, and don’t think he needs the touchy feeling stuff.

      We will debate this (and other things about Billions) at Veniero’s very soon!! XOXO

  4. Ah ha! Now I understand Zero Cost Collar better. It’s a wash. It’s insurance.
    Word Porn: Schneid 🙂

    Coaching is about immediate solution-focused therapy to touch on surface issues, such as performance; mostly career-related performance. Relatively non-emotional. Who wants an emotional trader? 🙂

    Psychotherapy is about deeper analysis of behavior and emotions and how those effect your interpersonal relationships, decisions, and overall life; treating a diagnostic disorder.

    I agree with Damianista about Axe and Wendy’s relationship. I think there’s more to their history and hoping Billions explores it for us viewers,

    1. That Zero Cost Collar did get a lot of people, but I’m glad I could clear it up. 🙂

      And you are so right – an emotional trader will make mistakes because the emotions cloud their vision.

      I think I resist to a certain extent Wendy, because in this very Alpha Male business, getting that kind of “help” would not necessarily been seen as a positive. And, again, it’s just my opinion. I’d never use a Wendy. I rather just figure it out myself.

    2. I agree with you neither Axe Capital nor any other workplace would want to dive deep into an employee’s emotional issues, they just want him to perform better. But I guess coaching should at least help with suppressing some emotional issues, or sweeping them under the rug, so one can perform. Not that I have any experience with that, but I remember Wendy asking Danzig about his personal life, his marriage, his sex life, too while she was trying to find why he lost his mojo. And it may be my ignorance about psychotherapy: I thought everyone could see a therapist even though there is no diagnosis so you just talk and feel better. As I said in my comment above, almost everyone around is seeing a therapist and they say they feel much better because of that.

        1. I think we will see the stark difference between the two treatment modalities when comparing Dr. Gus and Wendy’s techniques.

          1. That’s a very good point, I am looking forward to seeing their differences and hearing your insight!

  5. Great post Lady! Interesting to hear Axe’s motivations from the perspective of a gambler sort of addicted to the rush of winning. In that way, gambling seems to be an addiction unlike others in that its more socially acceptable (in this country anyway) to gamble than it is to say, drink or do drugs. Makes you wonder though, what is the tipping point at which gambling becomes a problem…surely not just when you’re losing, because, as you (and Bobby AND Damian) have said, it’s not really about the money. Great thread to follow in this series!

    As for Wendy’s therapy: I think Axe needs Wendy as a sounding board more than anything else. The same way a drop-dead gorgeous model can see herself as fat and ugly, Bobby, despite his obvious boot-strapping ability and success, finds something missing in himself that only Wendy can point at and help fill. The psyche is a many layered thing. You never really know what ineffable needs drive a person unless you’re able to put yourself in their shoes. Coaches/therapists like Wendy have the training and ability to empathize with people who sometimes can’t empathize with themselves. I know that defies all logic, but that’s the brain for you, not all logic all the time. 🙂

    I think Wendy doesn’t practice psychotherapy in the way it’s generally understood (by people who’ve never gone to therapy) as a place to talk about your feelings. Her technique is more a form of Cognitive Behavior Therapy, ie pointing out behaviors that need to be adjusted in order to get a person back on track. So, yes, relatively non-emotional, as Krista pointed out.

    So looking forward to more of your expert insights going forward in this season!

    1. Thank you Jania! I’m also looking forward to see if the “gambling” aspect plays a role in this season. From previews, I know there is a poker game scene, so it’s going to be interesting.

      I also agree about Wendy being his sounding board. I totally get having someone to just listen to you. I’m luck enough to have my partner be that for me. Since we are in the trenches together everyday, he gets it, and get help me get perspective when things get a bit dicey. But, Axe saying he can’t make the changes at Axe Capital without her just seems a bit of a stretch to me. But, I know I’m in the minority, but do love everyone’s opinion!

      I think we all bring such different POVs on this show, and I just love it!! I look forward to you continuing to bring the emotional truth to us every week!

  6. Hi Lady Trader,
    I haven’t seen the new season yet, but last year I thought Wendy was worthless, but you know hedge funds like to say they have… anyone to do anything, but I think Axe likes her there because it’s his office wife. Which is why his own wife hates her and tried to tell her what to do, but that didn’t work. Anyway, there is always an office spouse some just aren’t compensated as well.
    Glad to see you doing what you love.

    1. Hi Kami! I love your idea of the office wife! I never thought of it that way! And yes, most people don’t get compensated like that anywhere!

      I hope you continue to come and read our recaps and join in on the conversation!

  7. It is good to have your POV/opinion on things. I am on board with your question of “if you don’t have trust, what do you have?” especially since it was not Wendy that broke that trust. Those issues were all his and it was a lack of trust that caused the issues, not trust. He has himself all confused and in a twisted mess. I also agree completely that we saw quite a bit of Henry in Bobby in this episode…and that it certainly was not good. It all ties in together.

    This brings me to Wendy. From the numbers side of it and motivating himself, there seems little need for Axe to rely on Wendy, but from what I see, one of the issues is perhaps relating to his staff. How are they going to cope with this more paranoid version of Axe, without Wendy there to be the barrier between them?

    Thank you for explaining quantitative analysis. Now that you have, I recognise that some football clubs here in the UK are using it in trying to identify players to buy. Your mentioning baseball is also interesting as Bobby seems to like his baseball too.

  8. “She doesn’t work with Axe anymore. Axe relies on her heavily, though. Of course, there’s always going to be a question of pride with him, and he attempts to lure her back. But it’s because, I think, there is some truth in the fact when she says, “We built this company together.” I think she is good counsel for him, and he needs her. He feels more confident with her.” – Damian Lewis in this interview:

    1. Hey, girl, don’t go far for that answer. He told it to me earlier:
      “She considers herself a partner and he is very reliant on her.”
      And I believe him 😀
      BTW, that one is a pretty good interview. Those guys always do great interviews that are overlooked because they are not big media outlets.
      Looking forward to Axe’s birthday!

  9. His character exudes so much confidence, found it ironic Axe feels more confident with Wendy. So maybe not so much about counseling/coaching sessions to bounce things off of her, but more of a security blanket?

    1. I really think of Wendy more of a rock in his life. Everyone needs that and everyone may find it at a different place. Bobby had Wendy just after 9/11 when he was emotionally shattered. She is someone that did not only put him together but also has been able to keep him grounded for years so he does not become a loose cannon. As much as he exudes so much confidence, Bobby is a human-being, too; and I think his one weakness is he can act on an impulse. And he is sometimes scared of himself in the sense that he knows there will be times he will not be able to stop himself — Wendy’s turf. And Wendy could be the only one that can say “no” to the king. His three soldiers – Wags, Hall, Bach – give him looks but they say what he tells them to do after all. Wendy is different. My two cents.

        1. Awww. Thank you!!!!!
          Bobby – Wendy relationship has become clear in my mind once Bookworm made her argument about Peter Pan. And everything fell into place.
          Peter Pan was my favorite book when I was a kid and I ran around Kensington Gardens to find his statue first time I was in London 🙂
          I should have my picture somewhere. Haha.

  10. You can actually see all the details of the option idea that Taylor is suggesting by pausing on the Bloomberg screen. The stock price is $42.50, and the collar is not exactly zero cost but almost!

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