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He doesn't have to short, he can buy put options on the S&P500.
by tma-1 10y ago
He doesn't have to short, he can buy put options on the S&P500.
- deleted 10y ago[deleted]
- lujim 10y agoI've got put options on SPY as well as a portfolio hedge. They lose value every day (theta or the premium you pay for time) and if the S&P goes up puts lose value so fast it would make your head spin. In the end for a big liquid etf like SPY, they aren't that much different than going short. Now for small companies that could skyrocket overnight and destroy a short seller, puts offer some protection since your loss is capped at 100% instead of theoretically infinite losses. edit: I should add that puts give you leverage. To short 100 shares of SPY you would need $20000 worth of margin, while to buy 1 sept 2016 in the money put (100 shares worth) you probably only need to cough up $800. If the delta value of the put is equal to 1, your gains or losses will move inline with that 100 share short position.
- zymhan 10y agoThat is a very accessible explanation, thanks.
- ikeboy 10y agoAnother way of looking at it: Shorting is (roughly given efficient market assumptions) equivalent to buying a put and selling a call at the same strike. If the stock has no chance of going up a lot, the call will be relatively cheap, and so selling the call won't change much. Edit: on the other hand if it has low volatility in both directions, then both are cheap, and it's a bit more complicated. Buying the put will be cheaper, but shorting will also require less margin because the margin provider will have less risk. (See e.g. http://openmarkets.cmegroup.com/3785/understanding-margin-changes http://openmarkets.cmegroup.com/3785/understanding-margin-ch...). This should cancel out in theory, but might not for various reasons like transaction costs.
- roymurdock 10y agoJust look at the payoff graphs. This is how options are explained and tested in finance classes and they are usually more accessible than textual descriptions. http://i.investopedia.com/inv/articles/site/short_vs_put.gif http://i.investopedia.com/inv/articles/site/short_vs_put.gif This link is simple and doesn't point out strike price or take transaction fees into account but you can draw similar graphs that do.
- explanibrag 10y agoYes, that's a futures (or forward) trade. Doing the whole thing as a forward would be cheaper than trading a put and a call.
- deleted 10y ago[deleted]
- scurvy 10y agoGotta make another trade to neutralize that theta component like a calendar spread. For situations where you're making a bet on a really really big move, ratio spreads are the best.
- lujim 10y agoNever used calendar or ratio spreads. I just avoid options in their final month when theta starts really ripping. I will check them out though.
- base698 10y agoI had calls on spxs at the start of the year. If didn't work out that well. But I have similar positions again. Any reason you chose spy over qqq or others?
- lujim 10y agoqqq would probably be ok. I like the open interest and spreads on spy options. I'm not looking to make a killing on options (or I should say I would love to but don't think I could), just looking to hedge out some systemic risk on a buy and hold portfolio.
- deleted 10y ago[deleted]
- base698 10y agoI've made some huge mistakes, but I'm up 20% overall YTD. Just randomly picking tech stocks with out of the money puts has been profitable enough to stay up 20% even if the majority of them wash out. Biggest hit was 8x.
- aminorex 10y agoYou are doing it wrong. Every hedge should have positive carry.
- lujim 10y agoI own a diversified basket of stocks that I believe reflect the best of the S&P. Then I have a much smaller position in spy puts. The basket has a positive beta and increases in value much faster than the puts lose value. The puts are sept 205 strike and would be deep in the money if August 2015 or January 2016 happen again. Isn't that positive carry? I would love to find two assets that are inversely correlated but somehow both have a positive return at the same time, but I haven't found that yet :)
- yellowstuff 10y agoI don't understand. EG, say I'm long a portfolio of US equities that I expect to outperform the market. I want to hedge my risk in case the market drops, but I don't want to limit my upside. What positive carry hedge should I do?
- rsync 10y ago"I've got put options on SPY as well as a portfolio hedge. They lose value every day (theta or the premium you pay for time) and if the S&P goes up puts lose value so fast it would make your head spin" I wonder if you would compare/contrast with short selling UPRO ? That is, short selling the triple-long S&P 500 ETF. The thinking here is that a long ETF (especially a triple long one) loses value every single day[1] due to the natural decay of long ETFs ... So in a flat market, your short position is positive, and in down markets it is very positive. Further, it's not an option - you're simply short an ETF - so you can hold it through a market rally if you wanted to. I have never employed this hedge, but it interests me. [1] except for up-market days, of course ...
- lujim 10y agoI've never tried it. I'm skeptical that a broker would let you short a leveraged ETF since it's a bad deal for them. There are options out there for these but something tells me the decay is priced in or else it's getting into arbitrage territory. I have seen this question asked a few times before but never saw a definite answer. If you were able to short TVIX or SPXU or any leveraged etf for a long period of time it seems like a near 100% chance of massive gains which makes me think there is a catch.
- explanibrag 10y agoShorting ETFs is expensive. You need to borrow the shares from someone in order to re-sell them, and you pay them for the privilege. Futures work on margin with relatively low fees so if you wanted leveraged short exposure to the US market that's what you'd naturally trade. One of the posters below who describes buying a put and selling a call at the same strike is describing a roundabout futures trade. The put/call method would have far higher transaction costs, though.
- ScottBurson 10y agoThere are also leveraged inverse ETFs like SDS, which I have used at times. You don't want to hold them for more than a few weeks at a time because they decay, but for short-term trading they work fine.
- dxbydt 10y agoIf you are long puts on spy, imho it's much better to fund them with short calls at the same strike, and hedge yourself with long otm calls at 1.2*strike. ie. Forward + Call, as opposed to long put.
- scurvy 10y agoOr he can sell SPX calls. Or sell calls on another index or individual stocks. Or a combination of the two. Or he can sell futures. Or buy options on futures. There are a zillion ways of shorting the market while not selling or directly shorting your existing long positions.
- lujim 10y agoCareful with selling naked options though. You can have limited profit and unlimited risk in some cases. Selling naked puts on a stock you want to own or selling covered calls are pretty safe. Otherwise maybe spreads to hedge things out.
- scurvy 10y agoI didn't say they had to be naked. I almost always trade spreads. Naked options tend to be for casino individuals. Also, selling naked puts against the VIX is a good long hedge. It's not going to 0 and when it gets really, really low there's already a little resistance in there as skepticism kicks in. You won't make a ton of money on the downside, but you can sell enough to buffer any long losses.
- deleted 10y ago[deleted]
- metaphorm 10y agohe can, which presents downside risk on those options equal to their purchase price. however, the article seemed to describe a portfolio position of _actual_ borrowed stock, meaning he is trying to execute a classical short position trade on it, and not just hedge it with options. his downside risk in that case is basically unbounded, though realistically only as much as the stocks might rise in price which is not unlimited. but his ratio of short positions to long positions is 1.5:1 which means he could easily get blown out if he holds on for too long through even a relatively short lived rally. its a pretty substantial gamble no matter how you look at it.