4 ms·
Actually, if there really is a 50% drop every 7-10 years, I'd be very surprised if you couldn't make a killing buying cheap, far-out-of-the-money shorts.
by JoachimSchipper 12y ago
Actually, if there really is a 50% drop every 7-10 years, I'd be very surprised if you couldn't make a killing buying cheap, far-out-of-the-money shorts.
- beagle3 12y agoYou can't make a killing that way. In general, the market can stay irrational much longer than you can stay solvent. To win, you basically need more information (in the shannon information theoretic sense) than the market, on average, does. And when you actually compute it, "50% drop every 7-10 years, and not even with 95% certainty" is negligible information. Shorts and short equivalents are either effectively marked to market (e.g. futures are marked daily, short-sales are effectively as well through margin adjustment) or have a limited time horizon (liquid puts are 3m-6m, illiquid ones can be a couple of years, but with a ridiculously large premium). Let's say a drop of 50% happens over 1 year - then your 3m/6m "50% drop" puts don't actually net you any money, because it only drops 30% in 6 months. But they keep costing you all the time. And if you use futures/forwards/short-sales, you might (and often will) get margin called and squeezed on earlier appreciations. Unless you have a really large margin, which -- when you actually earn some money, if ever -- significantly reduces your earning in percentage terms.
- deleted 12y ago[deleted]