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Buying put options are a great way to protect yourself against downturn risk. I think of it like an insurance policy. You pay a premium to protect yourself in b

by chowes 7y ago

Buying put options are a great way to protect yourself against downturn risk. I think of it like an insurance policy. You pay a premium to protect yourself in bad times. However, I'd recommend always having a put contract outstanding, not just when you predict things getting worse. You got lucky this time, but next time you may be too late.

deleted 7y ago
[deleted]
whatshisface 7y ago
What are the advantages of lowering risk by buying puts over lowering risk by holding cash?
- bohadi 7y ago
  It seems OP is trying to hedge savings in the form of RSUs granted by his employer. Since they can't be sold yet cash isn't an option (pun unintended).
  - nostrademons 7y ago
    Money's fungible. Hold some cash that you save from your paycheck rather than donating it. (Little too late to do this for the OP, but it's pretty good advice for anyone else thinking of doing this.)
- seabird 7y ago
  The OP probably can't cash out on the RSUs at this point, and options plays are like shooting fish in a barrel at the moment. Remember that the hard part of an options play is knowing when something is going to happen with a fair amount of accuracy, but there probably won't be a miraculous recovery of the market in the next 24-48 hours.
  - highfrequency 7y ago
    No, the hard part of trading anything is having edge over other people. Options are not priced assuming there will be a "miraculous recovery" in the next 24 hours. They're priced based on the world's expectation of future volatility, through a very competitive market mechanism. There is no reason to assume you have better insight than people who model this stuff full-time. It's irresponsible to suggest that making money trading is akin to shooting fish in a barrel. Best case, it's a slightly negative EV gamble with high variance.
czbond 7y ago
Your strategy is a great one to work - no matter the prevailing trend! The trend for 10 years has been to become lax on protecting the downside. Even large funds have stopped protecting downside with puts. Your strategy doesn't produce the highest ROI year over year, but DOES protect premium year over year. Which is perfect.
pheug 7y ago
AQR disagrees with you: 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-...
- gowld 7y ago
  That article doesn't apply to unvested RSUs: "put options are quite ineffective at reducing drawdowns versus the simple alternative of statically reducing exposure to the underlying asset. " You can't statically reduce exposure to an unvested RSU. Also, the article concedes that there is one case where puts are useful: "Put options may offer crash protection"
  - pheug 7y ago
    Most big companies that I know with equity-based compensation typically forbid any hedging of their stock, especially through puts. But assuming hypothetically this is not an issue, you could sell short your company's stock to reduce exposure to your RSUs vested in the future.

by chowes 7y ago

deleted 7y ago

[deleted]

whatshisface 7y ago

What are the advantages of lowering risk by buying puts over lowering risk by holding cash?

bohadi 7y ago
It seems OP is trying to hedge savings in the form of RSUs granted by his employer. Since they can't be sold yet cash isn't an option (pun unintended).
- nostrademons 7y ago
  Money's fungible. Hold some cash that you save from your paycheck rather than donating it. (Little too late to do this for the OP, but it's pretty good advice for anyone else thinking of doing this.)
seabird 7y ago
The OP probably can't cash out on the RSUs at this point, and options plays are like shooting fish in a barrel at the moment. Remember that the hard part of an options play is knowing when something is going to happen with a fair amount of accuracy, but there probably won't be a miraculous recovery of the market in the next 24-48 hours.
- highfrequency 7y ago
  No, the hard part of trading anything is having edge over other people. Options are not priced assuming there will be a "miraculous recovery" in the next 24 hours. They're priced based on the world's expectation of future volatility, through a very competitive market mechanism. There is no reason to assume you have better insight than people who model this stuff full-time. It's irresponsible to suggest that making money trading is akin to shooting fish in a barrel. Best case, it's a slightly negative EV gamble with high variance.

czbond 7y ago

Your strategy is a great one to work - no matter the prevailing trend! The trend for 10 years has been to become lax on protecting the downside. Even large funds have stopped protecting downside with puts. Your strategy doesn't produce the highest ROI year over year, but DOES protect premium year over year. Which is perfect.

pheug 7y ago

AQR disagrees with you: 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-...

gowld 7y ago
That article doesn't apply to unvested RSUs: "put options are quite ineffective at reducing drawdowns versus the simple alternative of statically reducing exposure to the underlying asset. " You can't statically reduce exposure to an unvested RSU. Also, the article concedes that there is one case where puts are useful: "Put options may offer crash protection"
- pheug 7y ago
  Most big companies that I know with equity-based compensation typically forbid any hedging of their stock, especially through puts. But assuming hypothetically this is not an issue, you could sell short your company's stock to reduce exposure to your RSUs vested in the future.