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Patent post suggested drought of renters due to a recession. Recession can be hedged against by purchasing e.g. 12 months options that are far enough out of the

by DenisM 7y ago

Patent post suggested drought of renters due to a recession. Recession can be hedged against by purchasing e.g. 12 months options that are far enough out of the money to be cheap yet close enough to cover a major recession event. I don’t know if the math adds up, but I think it deserves studying. I’m not looking to hedge against all kinds of customer flight with an instrument, that’s clearly foolish as you noted. But particular events can be hedged.

huac 7y ago
what underlying asset would you buy the options on? if it's just on the overall market, then what advantage is there for wework to do that versus an individual investor?
- DenisM 7y ago
  I have made a long reply to a sibling comment.
dannyw 7y ago
The cost of consistent recession hedging is prohibitive and larger than the benefit you’d receive, because of arbitrage (if it was cheaper than risk, you could invest risk free). See: https://www.aqr.com/Insights/Research/White-Papers/Pathetic-Protection-The-Elusive-Benefits-of-Protective-Puts https://www.aqr.com/Insights/Research/White-Papers/Pathetic-... If you could hedge a recession, we’d have no recessions :) Hedging only works if you have short time durations (eg you wanna hedge specifically in October, because you have a big bill due then), or if you’re the one providing the hedge and capturing the Volatility Risk Premium.
- DenisM 7y ago
  I'm not looking for a blanket hedge though. "We Work" can have a built-in cushion against smaller recession events - long-term leases, being able to predict which percentage of short-term leases will dry up, cash reserves, some sort of counter-cyclical lease agreement (e.g. with repo companies), counter-recession marketing/education/etc program (e.g. "let's beat recession together by sticking together!" or some such). Where the hedge is coming in is making sure that the company does not end up upside down if recession hits harder than the built-in cushion can absorb. They could be buying 12 month S&P500 options on a rolling basis - buy a new batch every month as the previous batch expires. The idea is not to get paid each time SPY drops 5% down, but to get paid when it drops 35% down signaling an actual market crisis and have enough time/money to survive the hit. I don't know if it makes sense as I'm just making this up as a I go, but your criticism is selling the idea short. Ahem.

by DenisM 7y ago

huac 7y ago

what underlying asset would you buy the options on? if it's just on the overall market, then what advantage is there for wework to do that versus an individual investor?

DenisM 7y ago
I have made a long reply to a sibling comment.

dannyw 7y ago

The cost of consistent recession hedging is prohibitive and larger than the benefit you’d receive, because of arbitrage (if it was cheaper than risk, you could invest risk free). See: https://www.aqr.com/Insights/Research/White-Papers/Pathetic-Protection-The-Elusive-Benefits-of-Protective-Puts https://www.aqr.com/Insights/Research/White-Papers/Pathetic-... If you could hedge a recession, we’d have no recessions :) Hedging only works if you have short time durations (eg you wanna hedge specifically in October, because you have a big bill due then), or if you’re the one providing the hedge and capturing the Volatility Risk Premium.

DenisM 7y ago
I'm not looking for a blanket hedge though. "We Work" can have a built-in cushion against smaller recession events - long-term leases, being able to predict which percentage of short-term leases will dry up, cash reserves, some sort of counter-cyclical lease agreement (e.g. with repo companies), counter-recession marketing/education/etc program (e.g. "let's beat recession together by sticking together!" or some such). Where the hedge is coming in is making sure that the company does not end up upside down if recession hits harder than the built-in cushion can absorb. They could be buying 12 month S&P500 options on a rolling basis - buy a new batch every month as the previous batch expires. The idea is not to get paid each time SPY drops 5% down, but to get paid when it drops 35% down signaling an actual market crisis and have enough time/money to survive the hit. I don't know if it makes sense as I'm just making this up as a I go, but your criticism is selling the idea short. Ahem.