Your employment situation is uncertain, you give away most of your income, you have minimal savings _and_ you speculate in the stock market?

You, sir, are made of sterner stuff than I.

If you expect volatility to increase, which I think is very reasonable, then buying options is a very safe bet, and if you only put in a reasonable amount, it merely serves as insurance against getting laid off.

If the market gets bad enough for him to have to be laid off, his presumption is that the puts will be valuable enough to get him along for a little while. If it doesn't, then he probably loses money on the puts, but he's still employed, so it doesn't make much difference.

edit: I'm an engineer, not an economist, so this is probably wrong, but I think it's the line of thinking that songzme is on too.

> If you expect volatility to increase

If you have high confidence that volatility will increase more than the market expects it to.

> buying options is a very safe bet

There is no world in which buying options in a volatile single stock is a very safe bet

Unless OP actually works at CMG (in which case they're probably forbidden from buying puts), this is gambling, not hedging.

>There is no world in which buying options in a volatile single stock is a very safe bet

I agree. I didn't pick up that CMG was Chipotle (that's what comes up when I search CMG). Do you think if the underlying was something diversified, this would be a safe strategy?

> this is gambling, not hedging.

My understanding of it is that in times of high volatility, options go up. If OP expects ^VIX to go up in the future, which I think is very safe to assume at this point, then won't the value of a diversified option go up?

Again, maybe I'm confused... I don't really trade anything, so I don't have skin in the game. I just talk about the markets a lot with my friend who is into Quant Finance.

> My understanding of it is that in times of high volatility, options go up. If OP expects ^VIX to go up in the future, which I think is very safe to assume at this point, then won't the value of a diversified option go up?

Only if it's not already priced in. The price of options should reflect the market's expectation of what the VIX will do in the future. If everybody else thinks that things are going to get more volatile in the near future, then prices for options go up now, they don't wait for things to actually get more volatile. So when you're deciding whether buying options is a good deal, you not only have to decide whether or not you think that things will be more volatile in the future, you also have to decide whether other people already know that things will be more volatile in the future.

It's pretty dangerous to do this unless you're a statistician with an algorithm that can take all emotion out of the decision. As a (non-sociopathic) human, your natural impulses will be subconsciously influenced by the emotions of the people around you, so when you have a gut feeling that things are gonna get rocky in the near future, it's probably because everyone else already had a gut feeling that things are gonna get rocky in the near future.

More precisely, you can back out an implied forecast of future volatility from options prices, and the VIX index is actually computed from the prices of options on the S&P 500 index; it's not just trailing realized volatility.

The Plummet Protection Team has been working every day buying huge numbers of call options on stocks in order to signal a turnaround. It has failed every day and they have now spent hundreds of billions.

If you understand which calls they are making and at what times they make them, then you can buy the corresponding put and make a lot of money. That he increased his investment by a factor of 9 in a week or so shows how much money we are talking about.

If the fed stops doing these daily calls though you can get holding the bag. Also in the event of a total collapse you can end up never being able to redeem your gains.

Elite traders know this game and are happily taking the billions that the fed is shoveling to them.

For the public, we'll see the elite doing well and able to afford the inflated cost of goods that results from pursuing this policy over an extended time period when it has repeatedly been shown to be a failing strategy since there are actual fundamental problems with the market right now, such as supply chain issues, likely loss of large numbers of staff, and upcoming mass unemployment and a global Depression.

Fascinating! Do you have a source for this?

"The "Plunge Protection Team" (PPT) is a colloquial name given to the Working Group on Financial Markets"

If the PPT has not be working during multiple +7% falls on the Dow, they are not doing their job. President Ronald Reagan created the body in March 1988 after the 1987 crash.

The PPT has been "stabilising" (aka rigging) the stock market for nearly 40 years. How they operate and how much money they make is open to speculation. But it is widely believed that they purchase large-cap thinly traded stocks in the past few minutes before the close to minimise closing losses.

TL: DR - The PPT exists to minimise volatility during difficult times and they are doing their job.

I'm specifically interested in the claim that they have spent hundreds of billions on call options.

Yeah, that claim seems really dubious to me.

_And_ he uses JavaScript to the extent that he can teach people JavaScript (as per his HN profile). Clearly, he is used to dealing with danger.

+ he tries to save his system failure with market timed put options.

Luckily he was right 1 week ago. But it was luck only.

That is just a polite way of saying 'idiot'

Be sure to harvest some of that profit now. Going all in for 1200% gains is fine for wacky WSB plays using disposable income, but not when you need it to build up a safety net

if the market bounces back my RSUs goes back and I'm back to where I was. I don't plan on harvesting my put profits, I'm secretly hoping I lose it all.

you could lose on both ends. a quick double dip crash would wipe out your RSUs all the same and your options finish out of the money as 90% of them do.

One's investment plan should not rely on "if". Sit with a piece of paper - write down the scenarios that are possible, not the ones you want to happen. Now project forward - thinking what should I have done if each of these were true.

Buying put options are a great way to protect yourself against downturn risk. I think of it like an insurance policy. You pay a premium to protect yourself in bad times.

However, I'd recommend always having a put contract outstanding, not just when you predict things getting worse. You got lucky this time, but next time you may be too late.

AQR disagrees with you: https://www.aqr.com/Insights/Research/White-Papers/Pathetic-...

That article doesn't apply to unvested RSUs: "put options are quite ineffective at reducing drawdowns versus the simple alternative of statically reducing exposure to the underlying asset. "

You can't statically reduce exposure to an unvested RSU.

Also, the article concedes that there is one case where puts are useful: "Put options may offer crash protection"

Most big companies that I know with equity-based compensation typically forbid any hedging of their stock, especially through puts. But assuming hypothetically this is not an issue, you could sell short your company's stock to reduce exposure to your RSUs vested in the future.

What are the advantages of lowering risk by buying puts over lowering risk by holding cash?

It seems OP is trying to hedge savings in the form of RSUs granted by his employer. Since they can't be sold yet cash isn't an option (pun unintended).

Money's fungible. Hold some cash that you save from your paycheck rather than donating it.

(Little too late to do this for the OP, but it's pretty good advice for anyone else thinking of doing this.)

The OP probably can't cash out on the RSUs at this point, and options plays are like shooting fish in a barrel at the moment. Remember that the hard part of an options play is knowing when something is going to happen with a fair amount of accuracy, but there probably won't be a miraculous recovery of the market in the next 24-48 hours.

No, the hard part of trading anything is having edge over other people. Options are not priced assuming there will be a "miraculous recovery" in the next 24 hours. They're priced based on the world's expectation of future volatility, through a very competitive market mechanism. There is no reason to assume you have better insight than people who model this stuff full-time.

It's irresponsible to suggest that making money trading is akin to shooting fish in a barrel. Best case, it's a slightly negative EV gamble with high variance.

Your strategy is a great one to work - no matter the prevailing trend! The trend for 10 years has been to become lax on protecting the downside. Even large funds have stopped protecting downside with puts. Your strategy doesn't produce the highest ROI year over year, but DOES protect premium year over year. Which is perfect.

I bought 20 spx 2500 put options on February 10th for $1.30 ($2,600 total invested) because I had a gut feeling.

Today, those puts hit a high of $310,000

It's a shame I sold them too early!!! But still made about $20K.

I've been slowly winding mine down, it's hurt seeing what the ones I sold would have been worth, but at least I still have some left :) also hurt that I didn't spend more at the start. But I can at least take solace in the fact that the measured approach was probably wise.

Forgive my ignorance, how come they hit a high when the market 'crashes'? The market probably looked better on feb 10, no?

A Put option is the right, but not the obligation, to sell an item K at price X to a counterparty.

If you've agreed to sell a thing for $5 that is worth $4, you're a dollar in the green. As market prices drop your profit increases

Who is the counterparty to these trades? When the market sentiment is negative, the number of these counterparties are narrow and dwindling, surely it's not that easy to find people who will buy a thing for $5? Maybe they would buy at $4.25 or even less?

Good job asking from the other perspective. Here it is (over simplified to state a point, you would need to do more research).

Let's say Tesla stocks are at 700. If someone offered 2k in addition to the opportunity to buy tesla at $620 / share, I'm sure many people will be lined up to buy it. Not only do you get $2000 immediately in the bank, you also get to buy tesla stock at a 10% discount. Not a bad deal.

Thank you and parent posters, this makes it clear to me!

> Who is the counterparty to these trades?

Typically large trading firms, market makers.

> When the market sentiment is negative, the number of these counterparties are narrow and dwindling

That's why his $2600 initial investment made in a much calmer market is now worth $310k :)

For the right price you'll find somebody willing to sell you the insurance you seek. But in a volatile market like today, that price may be way too much for most people.

The counter party is set when you sell the put contract. When you set up a put contract, your broker will find a counter party (or none at all). To incetivice the counter party you pay them a premium, which they get to keep no matter what happens. Once you have the contract, it’s locked in and you have the party. That’s why you set up puts _before_ the general sentiment is that the market will go down.

And since a put is an agreement to sell at a certain price, how can you even sell such an agreement if it’s value has skyrocketed beyond the value of the underlying stock? Certainly the counter party would like to buy the put and let it expire (so they don’t have to pay 620 for a stock trading at 400) but how can the value of the put exceed 620-400? If I paid so much more for a put I would lose the amount that exceeds 620-400 (the amount I would gain)

Imagine it as a bet with a friend. You: "hey, I got this item worth 10 but I believe it will go down in the next five days." Friend: "no way." "want to bet? You will buy it from me for 10 whenever I want to sell it." "nah." "I will give you 2 to keep right now!" "alright."

Your friend has no say when or if you sell. He got paid and hopes you are wrong. Your friend will obviously not agree to pay 10 for an item that is already only worth 5. And yes if the item only goes down to 9 you lost 1 on the bet.

Options are worth an intrinsic value (the current stock price vs the strike price of the contract) and an extrinsic value (the implied volatility of the stock).

Large or sudden moves increase the volatility greatly which can result in the extrinsic value being multiples more than the intrinsic, and this is what leads to the wild profit capability of options.

At the same time, without those moves, or the lack of any umoves, that value can also rapidly decrease and leads to those options being quickly worthless.

I don’t mean to be dense but I am still missing something. I appreciate the fact that the counter party is locked in when you buy a ‘put’. But what if the counter party wants to get out of a bad deal and they declare bankruptcy? After all if they have to buy Tesla at 620 (using the example above) and Tesla is trading at 400 that’s a significant loss.

You are missing the key trick - hedging!

The person who sold the put to you can short some shares and lend out some money to create a "replicating portfolio" that inversely mirrors the payoff of the put option they sold you. They're making a small % on selling the put and then immunising themselves from the market movements.

Who lent them the stock to short? Index funds! The people who want to make market returns, still do. Everyone is happy

Typically, the other party is required to hold a margin account. If you sell a put for 100 units at $50, and the spot (current) price is $45, you're ($50-$45)*100 = $500 in the red. Your broker requires you in that situation to hold at least $500 (usually more) in cash (or cash-equivalent securities) in your margin account.

If the price dips even more, your broker will ask you to add more money to your margin account quickly, or they will liquidate your position. That means that when you don't keep enough cash to cover the loss, your broker will use the cash in your account to buy a put at $50, effectively zeroing out your position. You lose the money you had in margin account, but you are no longer losing (or gaining) money on market movements.

Traders selling options need either cash or margin to cover the trade (according to various calculations, not always the whole amount).

Their broker also monitors the risk and will liquidate any position if they feel it's too risky, and they have their own funds and insurance to cover trades.

Also the options exchange itself has funds and insurance to guarantee the contracts. There's enough money and liquidity in the overall market that it's extremely unlikely for you to worry about this counterparty risk.

It's more of a concern if you're a major investment fund making 9 figure moves and want to make sure banks remain solvent.

That's thinking really far, good stuff. The trading company (Ameritrade for example) insures up to a certain point. Ameritrade wouldn't let you make that trade if you don't have enough capital to back that trade. Lets say you somehow managed to do that trade, and you declare bankruptcy. I think then Ameritrade would have to cover that cost. Then if they can't, then Ameritrade declares bankruptcy. That's as far as I reasoned.

Put options writers need to post cash collateral to cover their obligations or go on equivalent margin (which will be monitored and enforced by their broker) in order to sell you a put.

If this fails, there's still Options Clearing Corporation managing $120B+ collateral and acting as ultimate guarantor for option contracts.

By buying a "put" he is wagering that the price will fall.

The more the market crashes, the higher the value of the put.

The bulk of that profit came from volatility spike, rather than simple directional price difference between strike and underlying ("delta").

VIX (https://finance.yahoo.com/quote/%5EVIX) was at 14-15 just a month ago and now at 65 - one of the highest ever! What a time to be alive after years of suppressed volatility!

Both calls and puts increase in value when volatility increases.

When market crashes, volatility shoots up through the roof and significantly increases value even for such deep out-of-the-money options, by far more than the difference between strike and underlying price. Essentially he made most of that money on volatility spike.

Sold a bunch of my Amazon stock earlier this year. I am slowly tempted to buy some of it back if markets continue to fall. I still have to figure out a comfortable assumption of where thongs will end up. Could be COVID-19 changes a lot of dynamics.

How do you buy a put? On etrade?

trite response: If you are asking this question, you shouldn't.

Actual answer: Most brokers will allow you to buy options and some specialize in it.

Options are very dangerous because you can lose more than you invested. (Which can happen shorting stocks too)

You cannot lose more than you invested when buying options.

Not if you only buy

Almost all brokers will offer options. BUT, before you buy puts or calls, do LOST of research. They are far more confusing and risky than stocks.

Just out of curiosity, where do you buy?

any trading platforms: robinhood, etrade, ameritrade, etc etc.

You have a mortgage and donate most of your income ... why?

Yeah, you should make sure to have at least a few months worth of cost of living available at all times. What you do with the rest is up to you really, I'd save it to be able to live off of for a year, then invest the rest.

Although I'm holding off on investing for now. Sold some of my 'play' money stocks (tesla etc) and put it in trackers. Might sell off those too and just wait it out a bit.

30 year fixed at 2k / month, 3bed 2bath in Berkeley. I plan to continue paying 2k / month for the next 22 years there's no point paying it off early. Like I said originally, the puts are there to make sure that if market dips I make enough to pay off my mortgage, so any money above 2k / month is extra for me (minus personal expenses).

> I plan to continue paying 2k / month for the next 22 years there's no point paying it off early.

Why? There's some good reasons to pay off a mortgage early:

1. You pay less interest, so you pay less in total. Don't worry about the tax rebate; it's only giving you back maybe 10% of your payments.

2. A mortgage is a loan. Fewer loans means less risk. Your house can't be foreclosed on if it doesn't have a mortgage.

3. Afterwards, you have an extra $2,000 every month, because you're not sending it to the bank. Your expenses (burn rate) goes down, so your savings will last longer if you lose your job.

Not op. There are also good reasons to donate money today instead of tomorrow. Positive change in the world can also accumulate interest of time, and problems can also get worse over time

Let's say they'd have to shell out $400k to pay off the mortgage. Their $2000/month payment would be gone, but if we assume an average of 6-8% ROI on the $400k, they are missing out on a return of $2000-$2600/month. 20 years from now, the $400k becomes $1.282.000. Minus taxes.

ROI or opportunity cost. I can continue to pay 3-4% on a few hundred thousand for a few decades. Meanwhile I have a few hundred thousand “cash in hand” that I can allocate to other assets/investments. I’m betting that my other investments will return more than my 3-4% cost. And since we’re talking decades I can choose when to unwind this allocation. As I near retirement then yes, I expect to pay off the mortgage just like I’ll move out of broad equities and in to bonds and dividend focused equities.

> I bought a put last week for 2k (CMG) and now its worth 18k.

You should really spell out the risk you're taking to get a return like that.

The risk is that you will buy thousands of puts, week after week, waiting for a crash to happen, and when one finally does you will have spent so much on puts while waiting that overall you didn't win anything.

I started doing this 3 weeks ago. Lucky me. The drop has been spectacular, as were the drops in 2008 and 2000. I only buy in after seeing spectacular drops. Again I’m not saying it’s the right strategy, I’m saying look into puts, study, observe, and maybe this works for you. Maybe not.

The total risk is 2k. So, the puts could end up worthless at the expiry date.

"Naked selling of put options can be quite dangerous in the event of a steep fall in the price of a stock. The option seller is forced to buy the stock at a certain price. However, the lowest the stock can drop to is zero, so there is a floor to the losses." https://www.investopedia.com/ask/answers/050115/what-types-o...

He's buying puts, not selling them.

You think market is going down: Buy puts, sell calls

You think market is going up: Sell puts, buy calls

Maximum loss when buying is only your investment.

OP is buying puts, not selling them.

"naked" "selling"

OP is doing neither.

How do you buy a put option if you have zero savings and donate your income?

updated, sorry.

Are rainy day funds not savings?

> I usually buy a put (option) just in case 2008 repeats itself. I bought a put last week for 2k (CMG) and now its worth 18k.

Chipotle Mexican Grill? Or is that something related to Chicago Mercantile Exchange?

Cuz like, the terms of my RSU package expclitly forbid dealing in related derivatives. I cannot offset downside risk like this with options.

It doesn't have to be related to offset the risk. For example you could offset using the SP 500 index, not violate the rules, and still protect yourself from a 07/08 style market collapse.

True, but I'm not sure how I feel about buying puts on stocks I own in bulk. If I'm making that kind of directional bet, wouldn't I also be better off shifting from SPY to AGG?

Yes, he's referring to Chipotle

I've had some short positions (different companies) to offset my own RSU market risk since I started my job a year ago.

Until the last few weeks I avoided looking. Now I'll avoid checking my company's stock for a while and look at the shorts instead if I want to waste time patting myself on the back.

> If the markets keep falling, I may end up with around 30k, which is enough for me to pay my mortgage for a year and a half.

Hope you're factoring in the additional tax burden of extra income. That may decrease your runway from 18 months down to 13-14.

I was saying these things in other threads and getting downvoted. Puts are basically insurance against shit hitting the fan. Thank you options and r/wsb

Thanks for sharing. What’s CMG? Also, how easy is it to buy options with Schwab or Etrade or similar?

CMG is the ticker symbol for Chipotle Mexican Grill, Inc.

With Schwab you have to apply for level 1 access to option trading, but it's pretty straight forward and quick since buying is low risk.

Possible high return per stock, 10% drop = $60 drop per share, which equates to a potential $6k profit.

You could do the same with Tesla, Google, AMZN. Any strong stable company with reason to fall other than the market trend would do.

Again, these are my thoughts, please take it with a grain of salt and do your own research.

You may need to call up Schwab and Etrade and tell them you want your account approved for trading Options. Or maybe you can already do it, check to make sure.

Why CMG though?

Possible high return per stock, 10% drop = $60 drop per share, which equates to a potential $6k profit.

You could do the same with Tesla, Google, AMZN. Any strong stable company with reason to fall other than the market trend would do.

Again, these are my thoughts, please take it with a grain of salt and do your own research.

I think you’re saying you shorted the entire US equity market, which I think is probably fine.

You probably won’t get caught, but buying puts, or anything modeled to behave like one, for your employer’s stock is almost certainly a violation of your employment contract if they’ve granted you RSUs.

“You will not short, or otherwise participate in derivatives associated with the stock” is standard RSU boiler plate.

He's shorting Chipotle and I doubt he works there.

that's right, I don't work at chipotle and I made sure I don't short my employer's stock.

Also correct, I'm essentially shorting the entire equity market. Chipotle is very volatile so there would be quite an upside if market trends downwards.

> I donate most of my income and I have very little savings.

Unless you're very sure that you're donating to people who will help you in return (a church?), it's wise to see to your own financial oxygen mask before helping others.

I'm all set myself. My only expenses are taxes and mortgage. I grow my own food in the backyard for fun and I'm pretty sure I can scale it up when the going gets tough.

Personally, I believe that giving should be done without expecting anything in return, otherwise it becomes an exchange, which I find incredibly exhausting.

You’re not “all set yourself” if you have little in the way of savings and are resorting to derivatives trading to make your mortgage payments.

Defer your donations until you have a year of payments in a rainy day account. You can’t donate if you’re homeless.

I'm sure it's a troll. It's a humblebrag at best, troll at worst.

But its not a troll. My donations are no different from a startup founder going all in. Except my vision doesn't end up with me making billions of dollars. I'm working towards a vision where people around me has food to eat, gets education, and has a comfortable shelter.

So retirement? What happens when you need care?

Do you wanna / have to work forever?

I think that this is a personal choice, not an objective "it is wise" choice.

Smart approach.

Pay attention to unwind it before April please IF it is short duration. Mainly sharing since you state you donate your income (much applauded!). There will be a sharp short slaughter rally in April, but then dropping off a cliff.... (do own due diligence). If you have a put into summer you're fine.

Are you from the future?

The rally in April is pretty certain imo, that's the "dead cat bounce", but the "falling off a cliff" again part isn't. I don't think anyone sees this as another 50% correction... Or do they?

No, but when the obvious trade (short) is apparent, it is easy to take out weak hands with the opposite trade. Plus large institutions need a rally after this warning shot to exit positions. Always look for the shock (which is just a warning) to follow up by an exit position, followed by the real action. Real action should happen later... downwards from May.

It really reads like that doesn't it? If you were from the future this wouldn't be a bad way to share that information.

Goldman and OP both think a further fall by summer is likely [1]

[1] https://www.bloomberg.com./news/articles/2020-03-11/goldman-...

These guys are like George in Seinfeld. So wrong about absolutely everything that doing the exact opposite is the winning strategy.

On a serious note, remember that they are not your friends at all. They make money when the rest of the investors are predictable. There is no incentive whatsoever for making accurate predictions.

Downvote parent all you want, but if you do - set a calendar entry to 90 days and if you are down 10-15% additional from here, please upvote my comment again. You are voting your emotions.

Link for you: https://news.ycombinator.com/item?id=22556929

thank you John Titor.