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I have covered and perfectly hedged costless collars (via options - +/- 10-20% depending on IV) on all my equity positions to protect myself against catastrophi
by confluence 14y ago
I have covered and perfectly hedged costless collars (via options - +/- 10-20% depending on IV) on all my equity positions to protect myself against catastrophic risks (aka black swans) at little to no cost to myself.
Here are some examples of risks I have considered (many more but cbf): economic failure (GFC)/terrorist attacks on TSLA (9/11)/unexpected death of main principals (Elon Musk et al.)/catastrophic accounting fraud (Enron/MCI Worldcom)/financial failure (Solyndra)/bankruptcy (A123)/production fraud (Fisker/BYD).
I've run many possible outcomes both in my mind and in computer simulations of TSLA's future finances (programming rocks). I've completed DCF, Monte Carlo and worst-case scenarios (by far the most important) on TSLA's future finances - which although shaky under certain conditions - do not particularly worry me, since I'm hedged, moderately risk taking and a value investor who doesn't really give a shit what the market thinks. I've got a range of prices based on market outcomes and future EV demand telling me whether to buy or sell.
I don't use leverage, margin, or derivatives that aren't fully covered and hedged by my own cold hard cash no matter what the environmental situation - let's me sleep like a baby. I hate uncapped risk - hate, hate, hate it!
I'm impervious to volatility, time decay and catastrophic risk.
My worst case VAR is 20% on the TSLA position - aka loss of 20%. I have no problems with that - I'm actually used to mark-to-market drawdowns of 50-60% - so 20% is peanuts (my current CAGR for the last 4 years has been 35% - mostly because I'm the guy that buys in a crisis with a margin of safety significantly below fair value).
My nightmare scenario is actually TSLA gapping up 20%+ without me being there to lock in another costless spread.
I'm not impervious to nuclear war - but you can't hedge that shit.
I know risk, tech, finance and economics inside and out.
Concentration is for people like me who know what they are doing. For everyone else - there's Mastercard.. I mean index funds :D
- tocomment 14y agoThat sounds amazing. Could you explain how you set up your hedge, and why it doesn't cost you anything? I'm just starting to learn about option strategies.
- confluence 14y agoBasic strategy (there are others): I own stocks in 100 chunk blocks. I then buy the exact same amount of -15-20% puts to cover my downside risk and simultaneously sell the same amount of ~+10-20% calls and use their premium to make the insurance free. My portfolio value, if hedged perfectly and fully backed with cash is now locked to +/- ~20% (depending on IV) at little to no cost. More here: http://www.investopedia.com/articles/optioninvestor/09/asset-allocation-not-enough.asp http://www.investopedia.com/articles/optioninvestor/09/asset... || http://www.theoptionsguide.com/the-collar-strategy.aspx http://www.theoptionsguide.com/the-collar-strategy.aspx || http://www.theoptionsguide.com/costless-collar.aspx http://www.theoptionsguide.com/costless-collar.aspx || http://www.advisorperspectives.com/newsletters10/Risk_Management_through_Costless_Collars.php http://www.advisorperspectives.com/newsletters10/Risk_Manage... Mark Cuban used this to stay a billionaire through the dot-com crash: https://www.quora.com/How-did-Mark-Cuban-survive-the-dot-com-crash https://www.quora.com/How-did-Mark-Cuban-survive-the-dot-com...
- tocomment 14y agoBut from you other posts it sounds like your expecting greater than 20% growth. I'd just worry 20% growth could happen fairly quickly.
- confluence 14y agoThat's what we in finance call a good problem to have.
- _debug_ 14y agoTSLA Puts seem to be priced with higher IV than Calls at the same distance for both near and far expiries (Calls at 120% vs. Puts at 80% of spot). I see Puts at strike $27 priced at 200% to 166% of the Calls at strike $41. Options chains from Google Finance : http://www.google.com/finance/option_chain?q=NASDAQ:TSLA&ei=Hv_EUNizAYL2kQXMEA http://www.google.com/finance/option_chain?q=NASDAQ:TSLA&... So I'm assuming that the TSLA collar (unlike your other equity collars) is not costless. Or is it? Am I missing something? Thanks for sharing your thoughts, BTW. I'm just loving going through your comments on other HN articles!