It's not that I dislike stock investing, it's that it doesn't have many of the advantages and flexibility of other types of trading. The tax treatment is terrible, there's a strong bullish bias against shorting, you have to borrow shares to short, the leverage of 2:1 is lousy, and there's no reliable way to protect your position other than trading something else like a futures contract or an option as a hedge. If you are going to do that, you might as well trade futures or options and get the tax treatment and flexibility to trade different months/strikes. It's not a harsh assessment, it's a fair assessment of the facts.
Is Options Trading Investing?
- Thread starter ironchef
- Start date
It's not that I dislike stock investing, it's that it doesn't have many of the advantages and flexibility of other types of trading. The tax treatment is terrible, there's a strong bullish bias against shorting, you have to borrow shares to short, the leverage of 2:1 is lousy, and there's no reliable way to protect your position other than trading something else like a futures contract or an option as a hedge. If you are going to do that, you might as well trade futures or options and get the tax treatment and flexibility to trade different months/strikes. It's not a harsh assessment, it's a fair assessment of the facts.
Buy and hold underperforms. The only advantage it offers is it lowers the bar for the ignorant to play and convinces them they are not at risk. Your information is dated. There's multiple studies of this on the internet, but you won't get them from big fund managers who prey off of people's ignorance. For example, Robert W. Colby tests @100 different indicators over a 100 years to compare performance vs. buy and hold at this link: http://www.robertwcolby.com/RelativeAdvantage.html
Buy and hold was cooked up to get the public to play a rich man's game. Predictably, many of them got taken, but many also made out. They made money because the statistics are heavily biased by the WWI and post WWII economy and the rise of the American economic empire. With Europe's industry in ruins, we could hand them a trade agreement and say take it or leave it. These are not the conditions today. The national debt is +$20 trillion, the dollar is ruined, our economy isn't growing at all, almost 100 million are without a job, much less a good one. Further, take a look at the Fed's balance sheet. Insiders are selling and mutual funds are selling, the only people buying are the government. This is a recipe for disaster, the biggest bubble in world history and it will leave people with over two decades trying to get back to zero. It's happened before, but never at this scale. Worse, stocks are also being levitated by stock buybacks while those same insiders, who are compensated based on stock prices sell their stock. Good luck with buy and hold. Even in the best of times (mid to late 20th century) your performance with buy and hold is highly dependent on when you put the money in and when you take it out.
Diversification? Where have you been? Those inverse correlations broke down years ago. When the market drops now, it takes everything with it.
If you like stock, trade stock, but you are kidding yourself if you don't hedge outside the stock market. When this thing blows, nobody gets out. The market will trade limit down for days, and the only people who get a fill will be co-located at the exchange, putting in their orders by the millisecond and still losing money.
No offense, but opinions have to be based on facts.
No offense, but opinions have to be based on facts
Let's take the total return S&P 500 data since 1871, it includes all sorts of economic environments including the Great Depression, a plethora of banking crises and many more interesting events. However, if you hold your investments for 20 years, your median annualized return is 7.8% and your mean return is 8.9%.Interesting. I am glad I was really lucky.
Where can I hedge against my stock holdings? And how best to hedge once I find the right asset class?
Not a problem. Appreciate your opinions.
Thanks.
Get a portfolio margin account for 6:1 margin.
Interesting. I am glad I was really lucky.
Where can I hedge against my stock holdings? And how best to hedge once I find the right asset class?
Not a problem. Appreciate your opinions.
Thanks.
Where to hedge: There are a lot of ways to do this. It depends on your underlying, in your case stock. Options are most often used as a hedge for stock. There are a number of ways to do this, however let's keep it simple.
1) Provided options are available, you could buy two at the money options (the contract has the same strike price as the current value of the stock) and you would be perfectly hedged. The problem with this is it's very expensive.
2) One alternative is to do what Marc Cuban did at the height of the tech stock bubble. As the CEO of Broadcom, he couldn't just sell his position. Instead he sold out of the money calls, and used the premium he collected to buy out of the money puts. This is called a collar. You can often put this trade on for very little outlay, or maybe none at all. If the market goes up, your potential gain on your position begins to diminish when the stock price hits the price of the calls that you sold. On the other hand, if the stock drops, it diminishes your losses. Cuban walked away with most of his profits whereas everybody else got hammered when the tech bubble burst. They spent the better part of the time since 2000 trying to get back to zero.
Options can cap your losses or at lease make them manageable, whereas buy and hold is a game of (usually) three steps forward, two steps back. The result is your outliers to the down side are limited in number and magnitude, saving you years getting back to zero and greatly improving your overall returns. There's a lot of other methods and considerations, but one doesn't have to be an expert in options to play a little defense.
Have a nice day.
PS: If you are interested in this, I suggest a podcast. I really like OptionsBootcamp. There's somewhere in the neighborhood of 89 one hour episodes where the moderators go over all aspects of options, and really lay it all out. It's much more entertaining than reading a book. At least half the books on trading are just garbage. My methodology was to listen to the episodes multiple times. This is my fourth time through and I pick up something new each time.
Zero-cost collars are great if you are an insider (talk to any IDB corporate derivs trader and he'll tell you stories of insiders collaring their stock and making out like a bandit) but they are usually collaring a smaller fraction of their stock and riding the balance. I can't imagine a corporate desk that would collar a majority stake for any founder considering the information asymmetry.
Then maybe the collar story is just some bragging baloney Cuban spread to make him look like a smart guy. I'm just a small retail trader, and don't pay much attention to the big corporate types. I recognized early on that if I wanted to be successful as a small retail trader, I had to learn my craft from a small retail trader. We don't trade like a hedge fund, and most of those guys just follow the crowd anyway. Ditto for old pit traders, the majority of whom couldn't make the transition to electronic trading. The same goes for educators, the majority of which parrot back the same baloney in book #40 as they did in book #1, most of which consists of systems and indicators which are worthless. I think we do ourselves a disservice looking up to gurus and just need to listen to everybody, especially other small retail traders, and take what we need. What works and what doesn't work is highly correlated, people can't always articulate it well, but there are definite connections between the winners and losers.
PS: Marc Cuban is an ass, so I'd bet you are right, he's just talking.
PS: Marc Cuban is an ass, so I'd bet you are right, he's just talking.
I buy the Cuban story.
I had a salesman who was a private banker in the late-90's who was collaring a lot of dotcom guys' positions. Guy starts a business and sells it for 75MM to Microsoft and Citi will collar the whole thing. It's very different from collaring Jerry Yang's position in YHOO.