[whisper voice]: If you’re tempted to hedge by buying some exotic bear fund, buying puts, or shorting stocks, you can accomplish the same hedging goals much more cheaply by just lowering your exposure to equities and holding more cash. There’s no free lunch, dynamic portfolio replication, etc.
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But if you take a huge negative position plus a huge positive position, you are guaranteed to be able to say that you called the next big market move.
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Very true. That’s why I always bet on both red and black when I play roulette. I value being able to say that I was right over all else.
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Don’t forget bonds, treasury bonds if you want zero risk.
What if all I want to hedge against is complete breakdown? Like buying some puts on a DOW-tracking index that corresponds to DOW 12k or something. I’ve got 30 years until retirement so I’m just holding for now (actually upped my biweekly 401k contribution), but do want some sort of backstop.
Sure but also be sure to hoard bullets, gold, gasoline and toilet paper - or anything else you might be able to trade with the road warriors so they spare your life.
Did anyone else watch that animated TV movie 2100 about the worst case scenario for global warming? Probably the most jarring part to me was the day that another weather disaster hit NYC, the whole city flooded, shit was falling apart everywhere else in the country, and the federal government just didn’t show up. Slowly everyone realized - we’re really on our own now.
You can buy way out of the money puts but how long do you need that hedge to last? You basically pay for time with puts. Where holding a reserve of cash you could buy in with at a super low price point might be better, if you think the crash could happen in 6 months and not like mid April
Yea good point. Even when gaming out a scenario like, let’s say buying way OTM puts that expire in May, I’m still struggling to come up with an exit strategy (like what if we’re halfway there in mid-April, do I cover or let it ride?).
Looks like it’s turtles buying all the way down.
Would that not cause the biggest sell ever and all the fun impacts of that. They couldn’t just do it suddenly what about people’s retirements?
I mean, the academic answer is that for any option that exists, you can create an economically equivalent portfolio of cash plus equities, avoiding the large transactions fees/bid-ask spreads associated with buying significantly out of the money puts. Say you own a $X position in the Dow index and the Dow is like 22,550 right now. You want to make sure that your position doesn’t go below a Dow value of 12,000. (That’s how I interpreted your post.) So you could stay fully invested and buy a put of some unknown horizon for Dow 12,000 for some unknown premium (which is pretty costly because out of the money put options tend to be very expensive in terms of implied volatility).
Or you could just reduce your investment to $X*(10,550/22,550), which guarantees that you’ll have at least the equivalent of Dow 12,000 in cash no matter how low the Dow goes. Of course if you reduce your investment like that you’re giving up some potential upside, but that’s the price you pay for insuring the downside. There’s no free lunch, and the more exotic the instruments you buy to get that protection, the more costly that lunch is.
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Thanks for the explanation I appreciate it.
Yes but I mean would you expect them to just suddenly close it unprompted? If so it 100% would leak to some hedge fund buddy and a sell off would happen anyway. If they say we are closing at end of today’s trade it would be the same end result.
My 401k has restrictions on most funds where I couldn’t buy back in if I trade too frequently. So basically the only move I ever make is down to 50 or 60% equities and then back in. The amount that I would trade with is less than 10% in size of the 401k, I am not dumb enough to risk something that could affect my quality of life in a major way. But the idea that trading that small amount is what is moving the market and not the actual news and people’s perception of the future value of the companies in the stock market is not something I am going to agree with.
In times like these, a lot of people are hard wired to make the wrong moves emotionally, selling at the bottom due to fight or flight and buying back at the top due to fear of missing out. This is the only real reason I could think of to close the markets. But it is much better for these people to just take Riverman’s advice, than to tel someone he can’t sell his stock for 2 months and have it open 40% lower at that time. Closing the markets would have so many negative unintended consequences I don’t see the point in trying to make a list.
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Taxes.
Not showing income.
Should I elaborate?
edit: individual stocks
Absolutely I think you should elaborate. I have a general idea of what you’re talking about and I don’t think it’s going to change my advice of not buying options or investing in leveraged bear funds. But I’m legitimately interested in having that discussion. That’s what this thread is for.
ok
income meets needs, not presently saving more. 50ish.
Suppose I have 100k invested. Individual stocks mostly, but also a couple etfs and berk. Long term holdings w almost minimal basis.
~90k+ invested. ~10k cash (emergency)
Health care through obamacare and get subsidy. If I show too much income, that goes away.
I see 25%+ drop coming (dow 26k to 18k), and willing to gamble a bit. Selling a significant portion of assets is double penalized (tax bill and health care bill) A 2k-5k flier on a put or bear etf with a 1-2 month window doesn’t feel out of line. Wouldn’t categorize as market timing.
Well I’m disappointed I may have missed the bottom, I’m just going to keep accumulating cash like a dummy hoping it’s going to go back down and hit my target. Worst case I guess I have cash on the side to put in a down payment for a house in a cpl years. I still don’t think the bottom is in, but we’ll see.
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This is a good argument for avoiding capital gains taxes when you reduce your equity position, but IMO it’s not a good argument for buying a put or a bear ETF. Instead, if you’ve got embedded capital gains you want to avoid realizing, I’d argue it’s cheaper to just short a roughly equivalent equity to get to your desired net position.
You really can’t close the markets in a time of crisis. What happens to people who lose their jobs and need liquidity, what are they supposed to do?
You keep saying this like you’re preaching to us as if we haven’t been saying that since November of 2016 in this community. That’s what WAAF means, that’s why we’ve been terrified constantly, it’s why we knew this would be really bad when you were basically making fun of some of us for it.
Like, this guy is withholding ventilators from NYC cause he doesn’t believe that they need them, withholding stuff from Michigan because the female governor has the nerve to not worship the ground he walks on, and here a few months back you were lecturing us on the perils of calling him a monster… and now you’re lecturing us that we need to get rid of him. No kidding. You don’t say!
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