Buying Puts for a potential crash?

[spindr0]

That is correct - at least up to a certain point in time as these things are just developing they look very similar. But what's more important is what to do about these things. How would you deal with one of the crashes you mention differently from one of the bear markets you mention?

If Rocket Man drops a nuke on Guam or Hawaii tomorrow and the market drops 10-20% or more, that's a crash and your Dow vs 50 EMA was worthless. As I said in the post that you replied to, unless you had some form of negative correlation protection in place prior to a crash, you took the hit (long puts, collars, etc.).

For a bear, again, as I posted previously, I'd do as I did in 2008 and transition from long to short. To be honest, I didn't do that exactly. I unloaded the bulk of my long positions by Dec '07 and then ran a long/short correlation portfolio biased to the short side for 18 months - so I was net short most of that time.

 

[jimmyjazz]

There may not be a detectable difference between a crash and a bear market as the event unfolds, but I'd sure rather have a long put in place instead of relying on my "signal" or whatever to tell me to exit a long stock.

 

[spindr0]

If you experienced Black Monday in 1987, you'd know the difference between the two.

As for 2000 and 2008, it's kinda hard to oblivious to the market dropping 50+ pct over 18 months. I'd call that detectable.

 

[sle]

I'd call that detectable.

I’ll call you on that. I think it’s very easy to detect it in hindsight but whatever logic you would work out will yield a ton of false positives.

 

[tomorton]

If Rocket Man drops a nuke on Guam or Hawaii tomorrow and the market drops 10-20% or more, that's a crash and your Dow vs 50 EMA was worthless. As I said in the post that you replied to, unless you had some form of negative correlation protection in place prior to a crash, you took the hit (long puts, collars, etc.).

For a bear, again, as I posted previously, I'd do as I did in 2008 and transition from long to short. To be honest, I didn't do that exactly. I unloaded the bulk of my long positions by Dec '07 and then ran a long/short correlation portfolio biased to the short side for 18 months - so I was net short most of that time.

You're over-stating the risk of a crash by not being clear what a crash is. There have been 5 days since 1900 when the Dow dropped more than 10% in 1 day.
19/10/1987: -22.6% (Black Monday)
14/12/1914: -20.5%
28/10/1929: -13.5%
29/10/1929: -11.7%
05/10/1931: -10.7%

Every one of these would have been avoided by following either of my two rules. Of the 20 worst 1-day falls in the Dow since 1900, 16 would have been avoided by the same rules. All the talk of devastation from market crashes is unjustified.

 

[tomorton]

There may not be a detectable difference between a crash and a bear market as the event unfolds, but I'd sure rather have a long put in place instead of relying on my "signal" or whatever to tell me to exit a long stock.

I don't ever hedge anything, so I've no practical experience doing this. So, are you saying you always carry a long put alongside your long equity positions, just in case there's a crash without a warning signal?

 

[spindr0]

I’ll call you on that. I think it’s very easy to detect it in hindsight but whatever logic you would work out will yield a ton of false positives.

Nothing in the market is linear so there are always false positives. There is no precision timing. But there is a plethora of information that indicates that a market has reversed and none it indicates how long it will last. You assess, you place your bet and you hope the trend continues.

If my recollection from reading another topic chain is correct, you sold most everything when Trump was elected. Yes? Did you also do that in 2008? I cleared out of most of what I owned in early 2000 and again by 12/31/07. I'll accept the conclusion that maybe I was lucky twice. In the market, it's better to be lucky and make money than to be smart and understand why you lost money

 

[spindr0]

You're over-stating the risk of a crash by not being clear what a crash is. There have been 5 days since 1900 when the Dow dropped more than 10% in 1 day..

I cited Black Monday in 1987 as a crash. I cited that if Rocket Man drops a nuke on Guam or Hawaii that it could cause an unexpected crash of unknown magnitude. Do you think that listing 4 other crash days of greater than 10% drop presents a different definition of a crash? I think that you are nitpicking.

Of the 20 worst 1-day falls in the Dow since 1900, 16 would have been avoided by the same rules. All the talk of devastation from market crashes is unjustified.

16 would have been avoided by your rules. That leaves 4 unaccounted for. More rules?

Unjustified talk? If we have an unexpected crash, I look forward to reading your rationalization for why your rules missed it.

 

[tomorton]

I cited Black Monday in 1987 as a crash. I cited that if Rocket Man drops a nuke on Guam or Hawaii that it could cause an unexpected crash of unknown magnitude. Do you think that listing 4 other crash days of greater than 10% drop presents a different definition of a crash? I think that you are nitpicking.



16 would have been avoided by your rules. That leaves 4 unaccounted for. More rules?

Unjustified talk? If we have an unexpected crash, I look forward to reading your rationalization for why your rules missed it.

Yes, a one-day crash could come out of the blue. Maybe the risks of that happening are higher now than in 1900. so having no strategy is not an option. What I'm saying is that my strategy has been frequently right.

As for the distinction between crash and bear market, you were the one who introduced that, whereas I say that if you're living through these things in real time, most crashes feel like bear markets and vice versa. So, as I say, treat them both the same would be my advice.

 

[tomorton]

I cited Black Monday in 1987 as a crash. I cited that if Rocket Man drops a nuke on Guam or Hawaii that it could cause an unexpected crash of unknown magnitude. Do you think that listing 4 other crash days of greater than 10% drop presents a different definition of a crash? I think that you are nitpicking.



16 would have been avoided by your rules. That leaves 4 unaccounted for. More rules?

Unjustified talk? If we have an unexpected crash, I look forward to reading your rationalization for why your rules missed it.

Black Monday 1987, 19th October. This was the worst one day fall in the Dow's value that I've heard of, and certainly the worst since 1900, showing a fall of 22.6%.

However, this didn't come out of the blue, it came out of a bear market. In fact, after making a then all-time high of 2764.8 on 25th August, the Dow closed below the 50EMA on 4th September. It made closes both above and below the 50 for the next 4 weeks but printed the worst decline so far of this period on 6th October, again closing below the 50EMA. The 20EMA crossed below the 50 on 12th October. So there were plenty of signals and there was plenty of time to get out.

I am urging traders who are long in equities to just observe these two simple and objective rules and get out at the earliest opportunity when they print - but not before they print.