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Crypto investing should die. But I would also want to see derivatives die. Like what it even mean to "invest" in QQQ or VIX? This is just gambling (unless you

Crypto investing should die. But I would also want to see derivatives die. Like what it even mean to "invest" in QQQ or VIX? This is just gambling (unless you have market inside knowledge).

arcticbull 3y ago
QQQ, like most ETFs, isn't a derivative. You get a share that represents a basket of all of the NASDAQ-100 companies. This tracks the price of the components through creation/redemption mechanism. Authorized participants are able to create QQQ by sending a share of the constituent companies to the trust, and they're able to redeem QQQ for the shares in the trust. In this way participants are able to arbitrage the spread between QQQ and the components and keep the price tracking extremely, extremely closely. It also pays a 0.61% dividend because when the component in the trust pay a dividend it's distributed to QQQ shareholders - the ones who actually own the shares of the companies in the trust. I would argue index investing is far less gambling than stock picking because you're betting on the overall direction of a market segment, in this case tech, as opposed to a specific tech stock. Stock investing, in aggregate, can be viewed as a positive-sum game - the value of your holdings tends to appreciate through the contributions of non-investor participants (company customers buying products -> increase in intrinsic value of the company). VIX on the other hand is a very exotic product, and it's not an investment - it's a hedge, if you can call it that. VIX is a mean-reverting index that spikes up when volatility goes up and drops back down over time, the notional value of which is based on the premium of calls and puts on the S&P 500 over the coming 30 days. It's the derivative of a derivative - a 2nd derivative, if you will. Note that, importantly, you cannot buy a "VIX," there's no such thing. You can buy cash-settled VIX futures where people speculate on the index value on a certain date, and you can buy cash-settled European-style calls or puts (i.e. they cannot be exercised except at expiration, vs American options which can be exercised any time on or before expiration). You can also buy ETFs like VXX and UVXY that use futures and cash positions to attempt to track the index. QQQ and VIX are very different things. [edit] When I say VIX futures aren't an investment, check this out lol. Set the graph in [1] to Max duration. Since 2018 it's lost 96.5% of its value. Heck it's lost just shy of 50% of its value since January 1st. They just continuously reverse-split so the numbers aren't silly. [1] https://finance.yahoo.com/quote/VXX?p=VXX&.tsrc=fin-srch https://finance.yahoo.com/quote/VXX?p=VXX&.tsrc=fin-srch
- whatever1 3y ago
  Apologies I meant SQQQ, inverse QQQ
  - arcticbull 3y ago
    Ah, nice, another classic product. I quite enjoy deep-diving on this stuff. I looked them up, they hold a bunch of QQQ index swaps. I'll have to research them some more later, may follow up if I learn something interesting :) I just happened to know how QQQ and the VIX worked off hand.
- electric_muse 3y ago
  Thanks for such a great ELI5
plewd 3y ago
That's what most day trading seems to be, there's almost no way to tell how prices will fluctuate in a single day
red369 3y ago
Aren't there more legitimate use for some of these for hedging? I don't know any specific examples, but I'm sure I've heard of situations where people use these because they want to invest in something quite specific, but remove the upside or downside of general market movement. Regardless, I'm inclined to agree the main point is probably gambling and insider trading.
rzi 3y ago
Derivatives let you trade things other than price and are important in hedging against certain types of risk. I don’t think the point is to invest in them so I agree it seems like gambling for most people.
- whatever1 3y ago
  If it is insurance call it insurance and regulate it as such. But today we are the point where we’re trading each others insurances betting on whether they will be triggered or not. That is bonkers.
  - jojobas 3y ago
    Let's say you invest in green energy. But as a hedge, you buy some deep OOM oil options. Should you call that insurance as well?
    - whatever1 3y ago
      You can invest in oil companies instead. Why do you need leverage? Why do you have the expectation of making 100X from a 2X price increase?
      - roywiggins 3y ago
        They're a lot cheaper than buying the actual stock, because there's every chance they'll expire worthless- and when you're hedging, you think they will probably expire worthless, too.
        whatever1 3y ago
        Problem is that the person who sells the option to you literally cannot guarantee that they can pay you because there is an infinite downside to them.
        jojobas 3y ago
consumer451 3y ago
> But I would also want to see derivatives die. My gut instinct is to agree. I also feel the same about the fossil fuel industry for the most part. I am curious which one of those two death wishes would lead to more negative economic impact in the short term. Based on my ignorant googling of relative values, I think erasing the fossil fuel industry would be much less devastating to investors in general, correct?
- ficklepickle 3y ago
  Erasing the fossil fuel industry over night would have the unfortunate effect of grinding the rest of the economy to a halt. You can't just look at it in isolation. Unless you had something like worldwide nationalization in mind. I suppose then it might be possible to transport other goods while still eliminating the speculation on and profiteering of the fossil fuel industry.
  - consumer451 3y ago
    I was trying to edit myself for brevity. I do think that for both industries a multi-decade phase out would give people plenty of time to change their investment portfolios. This would do less economic damage in the short term. That’s a good thing. In the case of fossil fuels, we still need to go all-in on alternatives for two functions: air travel and sea travel. We can do that in the time scale of 2 to 3 decades imho. But look up synthetic derivatives as part of the global economy. It is crazy. Such a huge piece of the economy. So crazy that it makes me have crazy thoughts like maybe let it be, with a Tobin tax of sorts assigned to novel anti-poverty solution attempts.
  - cplusplusfellow 3y ago
    Until the last already-drilled oil well runs dry.
    - consumer451 3y ago
      Yeah, I hear you. However, no new wells sounds like a great lever to pull. Forget CO2 for a moment, just the economic flourishi of all those very smart people released from oil exploration duties would be very interesting. Yes, fossil fuels created the amazing world that we live in, but they are obsolete on this planet. We have alternatives now. When I look at what oil companies have engineered, I am truly in awe. Sub-sea well heads are nuts! Rigs are gonzo engineering / operations in the coolest ways! Those people should be working on asteroid mining, or civilization scale geothermal, or 2-story-house-sized PV panel laying robots roaming the deserts. They could pull it off, and it is already 2023 ffs.
ncraig 3y ago
>Like what it even mean to "invest" in QQQ... just gambling There are many arguments that index investing is the best long-term strategy. Is NASDAQ the issue?
khuey 3y ago
In what sense is QQQ a derivative?
- arcticbull 3y ago
  Indeed NQ=F is the derivative
lmm 3y ago
Either you're hedging, you're taking risk and getting paid for it, you're market-making, you're arbitraging, or you're purely speculating/gambling. The first and second are genuinely useful, the third and fourth are necessary to grease the wheels, and the fifth is at least relatively harmless (no-one's taking a rake, so it's better than betting on the horse racing or whatever).

Crypto investing should die. But I would also want to see derivatives die. Like what it even mean to "invest" in QQQ or VIX? This is just gambling (unless you have market inside knowledge).

arcticbull 3y ago

QQQ, like most ETFs, isn't a derivative. You get a share that represents a basket of all of the NASDAQ-100 companies. This tracks the price of the components through creation/redemption mechanism. Authorized participants are able to create QQQ by sending a share of the constituent companies to the trust, and they're able to redeem QQQ for the shares in the trust. In this way participants are able to arbitrage the spread between QQQ and the components and keep the price tracking extremely, extremely closely. It also pays a 0.61% dividend because when the component in the trust pay a dividend it's distributed to QQQ shareholders - the ones who actually own the shares of the companies in the trust. I would argue index investing is far less gambling than stock picking because you're betting on the overall direction of a market segment, in this case tech, as opposed to a specific tech stock. Stock investing, in aggregate, can be viewed as a positive-sum game - the value of your holdings tends to appreciate through the contributions of non-investor participants (company customers buying products -> increase in intrinsic value of the company). VIX on the other hand is a very exotic product, and it's not an investment - it's a hedge, if you can call it that. VIX is a mean-reverting index that spikes up when volatility goes up and drops back down over time, the notional value of which is based on the premium of calls and puts on the S&P 500 over the coming 30 days. It's the derivative of a derivative - a 2nd derivative, if you will. Note that, importantly, you cannot buy a "VIX," there's no such thing. You can buy cash-settled VIX futures where people speculate on the index value on a certain date, and you can buy cash-settled European-style calls or puts (i.e. they cannot be exercised except at expiration, vs American options which can be exercised any time on or before expiration). You can also buy ETFs like VXX and UVXY that use futures and cash positions to attempt to track the index. QQQ and VIX are very different things. [edit] When I say VIX futures aren't an investment, check this out lol. Set the graph in [1] to Max duration. Since 2018 it's lost 96.5% of its value. Heck it's lost just shy of 50% of its value since January 1st. They just continuously reverse-split so the numbers aren't silly. [1] https://finance.yahoo.com/quote/VXX?p=VXX&.tsrc=fin-srch https://finance.yahoo.com/quote/VXX?p=VXX&.tsrc=fin-srch

whatever1 3y ago
Apologies I meant SQQQ, inverse QQQ
- arcticbull 3y ago
  Ah, nice, another classic product. I quite enjoy deep-diving on this stuff. I looked them up, they hold a bunch of QQQ index swaps. I'll have to research them some more later, may follow up if I learn something interesting :) I just happened to know how QQQ and the VIX worked off hand.
electric_muse 3y ago
Thanks for such a great ELI5

plewd 3y ago

That's what most day trading seems to be, there's almost no way to tell how prices will fluctuate in a single day

red369 3y ago

Aren't there more legitimate use for some of these for hedging? I don't know any specific examples, but I'm sure I've heard of situations where people use these because they want to invest in something quite specific, but remove the upside or downside of general market movement. Regardless, I'm inclined to agree the main point is probably gambling and insider trading.

rzi 3y ago

Derivatives let you trade things other than price and are important in hedging against certain types of risk. I don’t think the point is to invest in them so I agree it seems like gambling for most people.

whatever1 3y ago
If it is insurance call it insurance and regulate it as such. But today we are the point where we’re trading each others insurances betting on whether they will be triggered or not. That is bonkers.
- jojobas 3y ago
  Let's say you invest in green energy. But as a hedge, you buy some deep OOM oil options. Should you call that insurance as well?
  - whatever1 3y ago
    You can invest in oil companies instead. Why do you need leverage? Why do you have the expectation of making 100X from a 2X price increase?
    - roywiggins 3y ago
      They're a lot cheaper than buying the actual stock, because there's every chance they'll expire worthless- and when you're hedging, you think they will probably expire worthless, too.
      - whatever1 3y ago
        Problem is that the person who sells the option to you literally cannot guarantee that they can pay you because there is an infinite downside to them.
        jojobas 3y ago

consumer451 3y ago

> But I would also want to see derivatives die. My gut instinct is to agree. I also feel the same about the fossil fuel industry for the most part. I am curious which one of those two death wishes would lead to more negative economic impact in the short term. Based on my ignorant googling of relative values, I think erasing the fossil fuel industry would be much less devastating to investors in general, correct?

ficklepickle 3y ago
Erasing the fossil fuel industry over night would have the unfortunate effect of grinding the rest of the economy to a halt. You can't just look at it in isolation. Unless you had something like worldwide nationalization in mind. I suppose then it might be possible to transport other goods while still eliminating the speculation on and profiteering of the fossil fuel industry.
- consumer451 3y ago
  I was trying to edit myself for brevity. I do think that for both industries a multi-decade phase out would give people plenty of time to change their investment portfolios. This would do less economic damage in the short term. That’s a good thing. In the case of fossil fuels, we still need to go all-in on alternatives for two functions: air travel and sea travel. We can do that in the time scale of 2 to 3 decades imho. But look up synthetic derivatives as part of the global economy. It is crazy. Such a huge piece of the economy. So crazy that it makes me have crazy thoughts like maybe let it be, with a Tobin tax of sorts assigned to novel anti-poverty solution attempts.
- cplusplusfellow 3y ago
  Until the last already-drilled oil well runs dry.
  - consumer451 3y ago
    Yeah, I hear you. However, no new wells sounds like a great lever to pull. Forget CO2 for a moment, just the economic flourishi of all those very smart people released from oil exploration duties would be very interesting. Yes, fossil fuels created the amazing world that we live in, but they are obsolete on this planet. We have alternatives now. When I look at what oil companies have engineered, I am truly in awe. Sub-sea well heads are nuts! Rigs are gonzo engineering / operations in the coolest ways! Those people should be working on asteroid mining, or civilization scale geothermal, or 2-story-house-sized PV panel laying robots roaming the deserts. They could pull it off, and it is already 2023 ffs.

ncraig 3y ago

>Like what it even mean to "invest" in QQQ... just gambling There are many arguments that index investing is the best long-term strategy. Is NASDAQ the issue?

khuey 3y ago

In what sense is QQQ a derivative?

arcticbull 3y ago
Indeed NQ=F is the derivative

lmm 3y ago

Either you're hedging, you're taking risk and getting paid for it, you're market-making, you're arbitraging, or you're purely speculating/gambling. The first and second are genuinely useful, the third and fourth are necessary to grease the wheels, and the fifth is at least relatively harmless (no-one's taking a rake, so it's better than betting on the horse racing or whatever).