My main takeway from that was how the “Well you may have your facts and logic, but my stock keeps going up. Suck it!” crowd instantly disappeared after the crash. Either that or they were so morose you couldn’t even rub it in. There is no final joy in being right in those spots.
Thank you. I was trying to figure this out, and I always have to mentally calculate, ok a put is a contract that grants the purchaser the right to sell a stock at a given price, etc. It didn’t make sense, especially the doing something with cash lying around part. Does that imply that when you sell puts, you are required to have the cash in your account to cover the purchase of the shares in case the option gets exercised?
While I’m here, what would be a good place/option strategy for cash that otherwise should be in bonds? I’m seeing both stocks and bonds as historically overpriced, and just about to retire, so I’m looking for an investment or strategy that provides a cushion in case of a stock market downturn.
What I’ve found so far is writing covered calls, buying put options, or buying straddle options. Is anything else better?
Yes, when you sell puts you’re required to have cash/equity in your account to cover the purchase of the shares. Writing a put is writing an insurance policy against a stock going down, so your brokerage is going to do the same thing that insurance regulators do - require that you maintain the ability to satisfy the insurance contract in the event that the policy is triggered.
You shouldn’t do any of these things. If you have funds that you think would be appropriately invested in risk-free assets, you should invest them in risk-free assets. I understand that it seems crappy to invest in low-yielding accounts when you/we grew up with savings accounts that paid 5% or more. But you can’t create risk-free returns from thin air. Rates are low right now, and writing covered calls or buying puts or straddles or other exotic option strategies is just increasing your risk and burning transactions fees because option bid-ask spreads tend to be fairly wide.
For example, think about covered calls. You own the stock, and now you’re selling a call on that stock. It can look appealing! If the stock goes down, you get to keep the option premium, which is good. And if the stock goes up, you’re forced to sell it to the call buyer, but that’s ok because it’s at a higher price than current price. Win-win.
But the problem is that selling covered calls messes up your asset allocation because you’re sacrificing some of the upside on the stocks you own. If you thought that, say, 70% of your funds should be in equities, you’re expecting those funds to generate a certain average return at a certain level of risk. If you then choose to sell a call, what you’re doing is truncating the upside of those stocks (because you don’t get to keep the return above the call option’s strike price), which pushes the average return of your equity allocation down. Is it worth it to lower the expected return of your equity portfolio in exchange for getting the premium from selling a call option? It’s complicated - that’s what Scholes and Merton got the Nobel Prize for. I can tell you though, since options are priced at the risk-free rate, that current low risk-free interest rates are priced in option premiums, so the premium you receive from selling calls ends up just reflecting you earning the risk-free return anyway.
Overall, if you are willing to lower your expected return on your equity portfolio in exchange for a little bit more cash right now, you should just lower your equity allocation and stick the cash in a high-yield, insured, savings account.
If you insisted on doing something option-related: From everything you’ve said, the thing that makes the most sense for you is to sell covered calls. But that’s not because it’s a way to generate free money. It’s just a different way of lowering your allocation to stocks, which is what you seem to want since you believe stocks are overvalued. But even then, I’d still say to avoid options and just sell some of the stock, instead.
We’ve moved our fixed investments (40% of all retirement savings) into a combo of inflation protected bonds (I-bonds when we can up to our annual limits) and short and intermediate treasuries plus a chunk of cash. Just trying to mostly keep up with any inflation and avoid larger losses if rates start rising strongly. But we still have some total market bonds because those are the only good choices available in our workplace plans.
As someone who wants to bet against this market short to medium term one big problem is there isn’t a great way to do it. Options prices on any of the obvious candidates are sky high. I’m not so convinced the index funds get destroyed as some of these obviously ridiculously priced stocks so buying some reverse index fund doesn’t make a lot of sense. Shorting stocks in this environment is terrifying.
I’m sure there are lots of retail morons like me who think we are in an unsustainable trend but all of the ways to bet against something like TSLA suck. As others have said you have to be right on both timing and direction to win a short bet. The other side you have infinite time to be right.
So zimmer’s thesis that there basically is no one on the sell side seems pretty accurate as I am a huge degen who lost 10k buying puts from June-November 2020 and even I won’t pull the trigger right now.
Thanks for the reply. I’m fine with my current low allocation of stocks (~37% of non-RE portfolio), it’s the part that I would normally put in bonds that is worrying me. Because they are so expensive with little/no upside (I know when have I heard this before?), they don’t seem like a very good cushion, and in fact, have a price risk that is more correlated with stocks, compared to historical correlations.
So yeah, I guess I’ll put what I can into “high”-yield savings, and keep the rest in money market funds. I’m slowly increasing the stock allocation, with a goal of 80/15/5 stocks/bonds/cash about 10 years into retirement.
Are there exceptions? The only possibility I can think of is opportunity zone funds, where the tax advantages are substantial but not relevant to institutions. Retail money is a huge PITA for sponsors (100x the paperwork, more securities regulation hurdles, tax complexity, investors much more likely to default on capital calls, no opportunity to lay the groundwork for future fund-of-one/JV deals, etc., etc.). In my experience, sponsors who can get institutional capital do, and it’s only the up-and-comers who are using individual money. I have seen deals where institutional-grade sponsors are taking retail money, but only because retail investors were paying more fees or letting the sponsor get away with lots of stuff on the governance side that an institution would never stand for.
On the governance point, one thing to be aware of is that sponsors and investors have misaligned incentives due to the promote (sponsors are risk-loving because they get some of the upside while the investor has all the downside). Institutional investors go to great lengths to keep sponsors from doing things that are excessively risky. Even if the headline promote is reasonable, investors can still get screwed if the sponsor can put all their money into high-risk high-return investments.
People are treating GME like bitcoin but they forget that unlike bitcoin, the supply is not limited. At some point GME is going to do a massive offering to take advantage of this ridiculous price. Even if they could issue new stock for $30 they would be crazy not to.
