You can use ETFs for those instead of mutual funds…
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Yeah maybe I should.
You mean general questions about the current economic situation?
One thing I’m wondering is about the likelihood and impact of the Fed buying individual corporate bonds or CLOs. In the past I thought they couldn’t. What’s the impact of the going to be on the stock market and taxpayers?
Does he think we’re in a stage of capitalism where bubbles will become more common? Looks like we’re on the verge of having two in 12 years or so.
What’s the quickest he thinks we can go from ~15% unemployment to ~5% after a vaccine? Like even if it’s a V-shaped recovery for the stock market, it’ll be way slower for the workforce right?
Generally speaking do we have a shot in hell at the worst being behind us already economically? (Obviously I don’t think so.)
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One rarely discussed consequence of low interest rates is any change in rates results in larger changes in current stock prices.
If investors demand a 4% risk premium and interest rates fall from 7% to 6%, this results in an increase in stock prices of a little over 10% (price and expected yield are inversely correlated). But if interest rates fall from 2% to 1%, the result is an increase in stock prices of roughly 20%, all other things being equal.
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I feel like I’m losing my mind, because I’m convinced that we were recently talking about the kid who committed suicide after losing $700k trading on Robinhood. Anyway, this is the first explanation for how the kid managed to run up so much leverage, where it actually makes sense.
If true, the kid just misinterpreted his net position, which makes it even more tragic.
Short story: It’s like the kid sold a bull put spread, which has limited downside risk (equal to the difference in strike prices of the purchased vs. sold put). Those two positions roughly cancel each other out, but things temporarily look scary if the stock finishes between the two strike prices because you’re on the hook to buy the stock at the strike price, without the corresponding cash flow coming in from the other side.
Key paragraph:
When the stock closes between the two strike prices, the put you bought at the lower strike price expires worthless, but the one you sold is in the money and legally binds you to buy the stock at the strike price. In the case of three contracts of $2,615 Amazon puts, that would be $784,500 to purchase 300 shares. Over a weekend, say, you may see a –$784,500 debit to buy the stock, but you would not see the stock among your holdings until Monday.
Over the last year I’ve moved all of my money from mutual funds to ETFs.
Yeah this roundtrip stuff is BS. I want to be able to exit the market if things turn south.
So what would he actually have been up or down? A couple thousand?
Like once his account gets credited with the stock, the brokerage just automatically takes $730,000 of it and he keeps the rest?
So this 20 year old had >$700k liquid to invest, choose to do so through Robinhood, didn’t understand what he was investing in, and killed himself when he thought he lost the $700k even though he didn’t actually lose the money?
No, the $700k is what he thought he owed on margin.
Ty
If there were 300 contracts involving two puts with strike prices $5 apart, the maximum loss was $1,500 less the amount received when he created this position.
3 scenarios if the puts had strikes of $2,610 and $2,615 (like in the article):
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If the stock price is higher than $2,615 on the expiration date, both puts expire worthless, and the guy just pockets the $2 proceeds he got from the initial transaction (where he sold a put with the higher strike and bought a less-expensive put at the slightly lower strike). Total +$600
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If the stock price is lower than $2,610, he’s got an obligation to pay out $2,615x300 = $784,500 for the high strike, but he is owed $2,610x300 = $783,000 for the low strike put that he owns. That’s a $1,500 negative outcome offset by the initial $600, for a $900 net loss.
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If the stock price is between $2,610 and $2,615, he’s got an obligation to pay out $2,615x300 = $784,500, with no offsetting amount from the low strike put (it’s out of the money, and thus worthless). However, he isn’t just obligated to pay out $784,500; he’s obligated to purchase 300 shares of Amazon for a total of $784,500. So assuming those shares are immediately liquididated, his net outcome is 300xAmazon share price - $784,500 + $600. Unless there’s some dramatic fall in Amazon and the liquidation isn’t immediate, that net outcome is going to be less than a $900 loss.
If Robinhood’s interface presents this as a situation where he is in a net liablity position of $784,500, that’s a bad job by them, with a terrible outcome in this case.
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So basically in this scenario Robinhood is lending him $784,500 to buy the shares that he must then immediately liquidate to pay the $784,500 he owes?
Yes, but there’s a good chance the liquidation is automatic and immediate. Stock price closes at $X, put option with high strike price is automatically exercised triggering the massive negative cash balance, and sale should take place immediately at price very close to $X.
My casual understanding is that Robinhood is a complete clown show, so it might not happen like that.
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I’m seriously considering going to almost 100% cash by close tomorrow. I think the market is overpriced, and I think the hospital overflows and ensuing reduction in economic activity is at most two weeks away from being in the news and 3-5 away from happening in 3-4 states. Buffett’s on the sidelines, Burry called bubble and he’s mostly on the sidelines and in international stuff, Grantham called bubble and suggests 0% exposure to US equities.
I feel like if I feel that way and I’m on the same sideline as those three, I should probably go with it. I’ll stay in BSET, MRNA (and calls), JNJ, GSK, GILD, ZM, CTXS, WORK, but that’s like 10-15% of my portfolio and less than that of my net worth. Also own some VXX calls with a 7/2 expiry that I’ll hold onto.
I may talk myself out of this by 4pm tomorrow, but I just think there’s way more downside than upside over the weekend. Arizona could overflow and more bad news could come on cases in Florida, South Carolina, and Texas.
My one fear is that the Fed is just going to pump so much money into the market that none of it will matter, but I feel like they probably won’t start doing that before it starts going down, so being out is still better than being in. I’m going to read some Powell transcripts before I make my final decision.
@suzzer99 where are you at on this now? I know you’ve been on the fence about it, too.
Vaccine news could be another bump surely although I’m starting to see fed activity as far more significant than whether the vaccine is available in September vs January vs june 2021
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I’m 28% cash at the moment. I’m in a weird spot where if the market goes up 10% more - I’m going to really want to pull back to like 80-90% cash. But if the market starts tanking again I might want to do the same thing. I think that means I should get out.
I’m up big at the moment - to a point where I’d have been shitting myself thrilled to be in March, and even thrilled to be before covid. I feel like maybe I should just take my winnings off the table. I have enough for all my semi-retirement plans. But then again more money means more fun plans, and more wiggle room, and less worrying about making money here and there. 10% upside from here would fund 1-2 more years of cheap traveling.
Is staying in the market being greedy? Or is going to cash and pushing my luck trying to time the market again being greedy?
It really feels like 10% potential upside and up to 50% potential downside though.
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That’s true, good point! Although I don’t think any vaccine news is likely before July… But you never know. Moderna could just decide to drop some selective data any day they want to.
I’m ballpark 33%, and I’ve shifted my positions from heavier on VOO and VTI to heavier on QQQ, which has paid off a bit.
I feel like if you’re in right now you should be willing to ride it out if it starts tanking.
You basically can’t start traveling to the places you want to go until next year anyway, right? Going to cash now doesn’t mean you have to stay out forever. You just have to decide whether the risk outweighs the potential reward.
Yes.
No.
Somewhat.
I agree - at the very least it’s like 10% upside and 20-30% potential downside. Call it 25% downside. For it to be 0EV you have to think we’re 2.5 times more likely to reach the upside than the downside. I think it’s more like the other way around.
I have a friend who has a lot more money than me who’s been completely out of the market since Trump won. I don’t think he realizes how much he’s missed out on.