4 ms·

Can you tell a bit more how you use options to hedge against a downturn in tech? Seems expensive.

xtreme 7y ago
On the contrary. For example, MSFT is currently trading at ~$165. A single MSFT Put option expiring on March 19, 2021, which gives you the right (but not the obligation) to sell 100 shares of MSFT at $165 at any time before expiry currently costs less than $20. So for $20, you can protect your $16,500 asset from a market downturn for a year. Also, options were significantly cheaper before the recent increase in market volatility.
- raincom 7y ago
  You need to multiply that 20 with 100. It costs $2000 to protect $16,500.
  - Matheus28 7y ago
    For those unfamiliar with it: options are usually quoted per-share (even though almost all of them are sold in contracts of 100 shares), because it makes calculating the break even price a lot easier. For a put costing $20 on a $165 strike, the break even at expiration is $145. Also, you never buy long dated puts ATM in bull markets with the intention of hedging. It's usually much further OTM, since it becomes a lot cheaper. Right now all options are very expensive due to high implied volatility.
  - xtreme 7y ago
    You are correct, my math was way off. Buying ITM options is definitely not the best way to protect capital.
  - H8crilA 7y ago
    If it actually costed $20 everyone would be playing Taleb on much of their portfolios :). It is not cheap, and also not so easy to size everything properly. Hedging is not user friendly at all. Robert Shiller often complains about the lack of general public awareness when it comes to hedging. Rationally, if you work in an oil company you should be short oil, but the opposite is much more common to be found in the real world. Similarly with real estate - if you have a big mortgage maybe you should somehow be short on the real estate market elsewhere, just in case your city becomes the next Detroit.
redtexture 7y ago
When the stock market is booming, buy puts on a major index. SPY (S&P 500 index exchange traded fund) was around 335 in February. Buy, cheaply a put (right to sell 100 shares) at a price of 300, expiring in 60 or 90 days, for about $150. A couple of weeks ago, SPY was at 240. Sell the put, for a gain of at least (300 - 240) times 100 times delta (a description of relation of the option gain to the stock change) of about 0.60, for a gain of at least $3500 to $4500.
- eanzenberg 7y ago
  Do this 4 times a year times 10 years (last bull run) and you expire worthless 39/40 times for a net loss.
  - Matheus28 7y ago
    You wouldn't do it in the beginning of a bull run, only once it's been going for a decade plus.
    - IAmGraydon 7y ago
      Black swan events don’t wait for a 10-year bull market to occur first. You strategy might hedge against a market bubble (still very questionable), but what about all of the other things that can crash the market?
      - Matheus28 7y ago
        It's futile to try to make a strategy that will work 100% of time and still return the same or better than a non hedged strategy. If it's a black swan event, you won't be able to predict it by definition. I'm not sure what you're trying to argue.
    - yissp 7y ago
      https://en.wikipedia.org/wiki/Gambler%27s_fallacy https://en.wikipedia.org/wiki/Gambler%27s_fallacy

On the contrary. For example, MSFT is currently trading at ~$165. A single MSFT Put option expiring on March 19, 2021, which gives you the right (but not the obligation) to sell 100 shares of MSFT at $165 at any time before expiry currently costs less than $20. So for $20, you can protect your $16,500 asset from a market downturn for a year. Also, options were significantly cheaper before the recent increase in market volatility.

raincom 7y ago
You need to multiply that 20 with 100. It costs $2000 to protect $16,500.
- Matheus28 7y ago
  For those unfamiliar with it: options are usually quoted per-share (even though almost all of them are sold in contracts of 100 shares), because it makes calculating the break even price a lot easier. For a put costing $20 on a $165 strike, the break even at expiration is $145. Also, you never buy long dated puts ATM in bull markets with the intention of hedging. It's usually much further OTM, since it becomes a lot cheaper. Right now all options are very expensive due to high implied volatility.
- xtreme 7y ago
  You are correct, my math was way off. Buying ITM options is definitely not the best way to protect capital.
- H8crilA 7y ago
  If it actually costed $20 everyone would be playing Taleb on much of their portfolios :). It is not cheap, and also not so easy to size everything properly. Hedging is not user friendly at all. Robert Shiller often complains about the lack of general public awareness when it comes to hedging. Rationally, if you work in an oil company you should be short oil, but the opposite is much more common to be found in the real world. Similarly with real estate - if you have a big mortgage maybe you should somehow be short on the real estate market elsewhere, just in case your city becomes the next Detroit.

redtexture 7y ago

When the stock market is booming, buy puts on a major index. SPY (S&P 500 index exchange traded fund) was around 335 in February. Buy, cheaply a put (right to sell 100 shares) at a price of 300, expiring in 60 or 90 days, for about $150. A couple of weeks ago, SPY was at 240. Sell the put, for a gain of at least (300 - 240) times 100 times delta (a description of relation of the option gain to the stock change) of about 0.60, for a gain of at least $3500 to $4500.

eanzenberg 7y ago
Do this 4 times a year times 10 years (last bull run) and you expire worthless 39/40 times for a net loss.
- Matheus28 7y ago
  You wouldn't do it in the beginning of a bull run, only once it's been going for a decade plus.
  - IAmGraydon 7y ago
    Black swan events don’t wait for a 10-year bull market to occur first. You strategy might hedge against a market bubble (still very questionable), but what about all of the other things that can crash the market?
    - Matheus28 7y ago
      It's futile to try to make a strategy that will work 100% of time and still return the same or better than a non hedged strategy. If it's a black swan event, you won't be able to predict it by definition. I'm not sure what you're trying to argue.
  - yissp 7y ago
    https://en.wikipedia.org/wiki/Gambler%27s_fallacy https://en.wikipedia.org/wiki/Gambler%27s_fallacy