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Ask HN: How do you protect your stock against a 20+% drop?
There is 401k, IRA, passive investing, low-cost indexing and all that and the main thing is to be in for the long term. But still working in a big tech company generally ends up giving you RSUs and ESPPs that after a few years you have a single stock that is a good percentage of your portfolio.
Well, if we have auto-insurance for a car worth ~$20K, then why not something for a single stock portfolio worth in the $50K+, $100K+ or more?
One option is to do some portfolio insurance. Plan a strategy with Options (protective put, maybe a collar) and consider the risk-reward and the upfront cost that will go "waste" and also consider how long it has to be in place.
I am building a tool to automatically calculate the above said risk-reward ratios for various stocks for various prices, time periods. Would this be something that you could use?
EDIT: Clarified with a edit in the title. Instead of "market drop", it is "drop in your stock".
- ChuckMcM 9y agoI'm confused by your terminology, what is a "20+% market drop" ? There is an index drop, where the stocks that make up a particular index, but it is rare[1] to have a drop of that size across an entire market. You can always buy calls or puts on an ETF if you're worried about too much exposure there. So I'm wondering what "portfolio insurance" does relative to a financial adviser who can just tell you the risks. For 99% of the people out there buying into an S&P 500 exchange traded fund (SPX ETF) is pretty low risk. Sure you'll take a bath if world war III starts but even when the system gets hammered (like it did with the great Mortgage Meltdown of 2009) if you hold long the fundamentals will bring it back to where it "should" be. So I'm not sure I see a value proposition here. [1] From a list of crashes for entire markets they are quite rare over time -- https://en.wikipedia.org/wiki/List_of_stock_market_crashes_and_bear_markets https://en.wikipedia.org/wiki/List_of_stock_market_crashes_a...
- vixotic 9y agoThanks for pointing it out. I edited the title to say "drop in your stock" rather than Market drop. Agree on the indexes part. Say for example one has $GOOGL or $AAPL in the $100K range. A 20-30% drop would wipe out a solid chunk. Maybe planning to take out some in a year or so for a downpayment ..etc and the stock is down that much. Now you are left waiting out for N years for the correction to play out. Why not then spend say a couple of thousands, get some puts and hedge?
- ChuckMcM 9y agoFair enough. There is a challenge though which I've experienced first hand which is you own a stock which has become the biggest part of your portfolio but you can't trade it freely because you work at the company. That includes buying options on that stock, and it would include buying "insurance" which was a proxy for buying options on your stock. The only solid advice there is sell it when you have a chance to and move it into something you can trade and/or buy options on. If you don't work at the company whose stock is the 'big chunk' then it is easy, sell half and use the proceeds to buy into an ETF. Then you're risk goes from a 20% reduction becomes a 10% hit. Having all your eggs in one basket, especially a tech basket, was how a lot of people experienced a lot of loss in the dot com blowup.
- stanleydrew 9y agoIf you are intending to build this for privately-held shares I think you'll run into a few issues. The biggest one would be understanding price. If you're talking about for public-market shares then this seems useful.
- vixotic 9y agoYes, only for publicly traded stocks. Since they have Options listings and it will be easy to pick various strike prices, expiration dates and then compare multiple strategies. Think of it as a table of time-lines, costs (risk/premium paid), amount protected (reward). Thanks for your encouraging feedback.
- sharemywin 9y agoMaybe this could be for crypto currencies too? lots of risk easy to get in and out of(roughly speaking). All of it is dropping right now, but I would hope/suspect it will go back up in a couple of years.
- makecheck 9y agoThe "insurance" you seek is in the form of different investments that are probably more stable (e.g. bonds, or something in an entirely different market like buying a house). Stocks given as rewards should be treated, in my opinion, as valueless (i.e. make sure you have enough for rent and food based on what is actually paid, not some theoretical future that depends on stocks). Treat it like cash that you may or may not find on the street: "great, IF you get something, otherwise no worse off".
- vixotic 9y agoI respectfully disagree. Yes, your 401k's bonds and international diversification could hold its worth. But not for your company stock especially if it is publicly traded (which is what I am talking about). It's not unheard of to get 50K+ and 100K+ in RSUs. They are not valueless. Once you have vested it, it is whatever the market says it is. Nowadays engineers (with masters degrees) start at $120K at many places. You put 10% of your pay in ESPP and in four years you have ~$50K in your company stock. Again not valueless. Now you are looking at $100K+ in a single stock (your company) and it gets more riskier if you have had a stint at 2-3 companies in the last 10 year accumulating stocks at various places.
- makecheck 9y agoStock like that MAY not be valueless but it certainly CAN be. The company may fire you when a project is done, or sooner (all your RSUs: $0). The company may go out of business, and the “fine print” will certainly say that the big-boy investors receive a piece of the pie first before owners of restricted stock (all your RSUs: $0). Some of your RSUs may vest, turning into real stock, yet if you took the job assuming they would “probably” be worth $X, they could be worth anything by the time you vest (including much, much, much lower than you thought). Also, no one requires you to invest in an ESPP. Clearly stock in a single company can have tremendous returns but it is foolish to treat that like anything but pure gambling from a run-your-life point of view.
- techiefirst 9y agoThis is pretty interesting! I have been personally telling my friends(who have no clue about how to protect their RSU's or ESPP) about similar things. Esp. when someone says like if the stock hits this price I am going to dump all of my stocks(without even thinking about taxes etc.,) No one seems to bother about the downside risk. I will be interested in trying your service. Do you have any link or sample reports?
- vixotic 9y agoThanks @techiefirst. I wish I had a few sample reports prepared. That would've been a good "show and tell". Let me do that this weekend.