I wouldn’t worry about downturn unless we get below the 50-day moving average. Then I’d get more cautious and see if we test the 200-day.
I don’t think downturn is near either but I want to be prepared mentally. So let’s say I want to buy some insurance for my portfolio that’s mostly tech. Specifically I want to protect against a 20% drop within the next 6 months. So do I buy QQQ puts? What strike and what duration?
“Protect” in this case means, if my protfolio is 1m, 20% drop is 200k. I want my puts to go up 200k so I am even.
No need to do that. Insurance costs money. Just ride out the waves
Depends on how much money the insurance costs.
Remember I am heavily levered.
It’d cost $69k to buy enough September 170 QQQ puts that you’d make $200k profit on a 20% drop. You can decrease the cost by $13k with selling 135 puts which limit your gain to $200k. You’re paying 5.6% of portfolio value to protect against a 20% drop. Breakeven is around $163.
How about just buying $135 September puts? If QQQ falls to $135 in June the $135 September puts should still have pretty good time value in it? Looking at April $170 puts which is 3 month from now it’s priced at around $5.
Also in the event of a 20% drop volatility would be high and thus the puts would fetch higher price?
Computation of 20% is tricky Count from where?At the point of buying the put? What happen if it went up 10% first and then decline 20% from the point of buying i.e. drop 30% from peak.
Yes. Thought about this for a long time. Probably best to just ride it. 20% is not a big deal.
IMHO, best is to deleverage.
Buy puts mean add $, increase leverage right?
The next question, if after 6 months, it didn’t decline, buy new puts?
You can’t keep buying puts, it eats into your return significantly.
If you’re buying puts for your portfolio, it means those stocks are fundamentally sound and won’t go bankrupt or into a permanent downtrend for too long (like 5-10 years or till when you need money to do something else). So, if not leverage, ride. If leverage, just calculate how much to deleverage to sustain a 20% decline.
Why I like deleverage because you raise $ rather than pump more $.
It’s a brand new year and I’m back to my home-buying leveraging ways again… isn’t it fun to shop around for homes… I feel like a kid in a candy store…
I assumed 20% from current so the index would hit 135 in September. It’s true it might go 10% or more higher before dropping 20% from that high. It doesn’t seem worth hedging. I’d just set a moving average as a stop where you deleverage. Which one depends on your amount of leverage and time horizon. The 10, 50, and 200 are the most common. 50 probably makes the most sense.
I prefer selling covered calls as a hedge.
Exactly, raise some cash. Buying puts = put in cash, not preferred.
Well, manch can do some zero cost collar or slight variations if he doesn’t feel too complicated.
Leverage is enemy during downturn, but friend after down turn !
Bubble Watch XXVI: On the Lyft ride on the way to the airport this morning, my driver was pretty entertaining. He told me how he bought 3 houses during the housing bubble (while working at UPS) and lost all 3 in 2007/2008 after he got laid off (he used the equity in his first house that went from $180k to $500k). He now drives for Uber and Lyft and last year made $120,000 (saving $50,000). Pretty good money I guess.
So, guess what he wants to do with the $50,000 he saved. Buy NVIDIA because he feels it’s going to $1400 (stock price that is, not the amount he saved). And he has a good attitude. If this gamble doesn’t pay off, he just has to work hard for an extra year to save back what he lost…
The gamblers are loose.
I happened to like Nvidia too.
Enough to put your lifesaving in it?
Only 2% of my portfolio.
Are you implying the end is nigh?
Talked to another millienial into crypto currency. Is a janitor making $12/h. I tried to get him interested in construction where he could double his salary, wouldn’t even listen. Only losers are buying shitcoins