The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Financial.Velociraptor on April 22, 2017, 05:31:02 PM
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Trump is pushing hard for 1.4B to be in the budget for his border wall. That can only happen is 8 Democrats agree (No Dem Senator is currently in favor). Without a budget, the government partially shuts down after the 28th. Markets could be jumpy on Monday morning the 1st.
I'm pondering a low cost hedge like a SPY put. Anyone else looking to trade the budget talks?
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No. It's an unknown outcome that is going to be decided by crazy folks (on left and right) and it's unknown how the market will react. I would see placing some puts as essentially equal to gambling. If you find that fun, then by all means give it a go. I prefer to have a few less variables in play before placing a bet...
If a shutdown occurs because Trump insists on getting a vote on a big tax cut then the markets might react positively. However, if there is just general stupidity (Tea party insists on higher military spending while removing funding for ACA and planned parenthood) while Trump insists on a boarder wall then the market might determine nothing is going to happen and unwind some of the tax cuts that are priced in right now.
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It's all a matter of how long it takes to put a clean CR on the table. I expect that all Democrats are going to say "remember how you guys were the party of "no"? We remember too".
How's that going to affect the market? I don't know. Every other government shutdown has been great for me. Free entry into Grand Canyon, no traffic, worked great.
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Didn't the market react favorably the last time shutdown occurred (2013)? Also, what happened to the 95-96 shutdown?
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Free entry into Grand Canyon
Eh? I remember being denied entry to the GC until the state kicked in funds to keep it open. Same with every other NP. I guess, with no rangers, we could've just...parked elsewhere and hiked around the gates?
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Making America great, eh?
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I'm probably asking the wrong crowd considering "hedging" is equated with "gambling" here.
If I were to put on the trade I'm considering 100 times, I'd expect to net lose money. Much the same we should collectively as a group expect to lose money on life insurance policies. This isn't about beating the market. It's about paying for an insurance policy to protect against a catastrophic event. I'm fine with "losing" so long as it is a trivial amount.
Proposed trade: 183 strike put on SPY at Dec 29, 2018 expiry. Forty contracts. Spend about 7,800. Keep the trade open through Monday with expected losses of time value to be about 50 to 100 dollars. Actual gain/loss will be sort of randomized based on up/down movement of SPY. In the event of a 10% market over-reaction on Monday, I'd make about three times my money. Sure would ease the pain of seeing the broad portfolio take a short term shot on the chin. And I'm certain to be able to weather the cost of the "small" (likely) loss.
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Nothing more than cheap popcorn. Can't wait to watch the fallout.
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I'm probably asking the wrong crowd considering "hedging" is equated with "gambling" here.
So you're placing a "bet" that in most cases will loose you money, but in the case of an unlikely event you will win a large sum? Uhm, sorry this is different from gambling how?
BTW; not sure I see the basis for this bet (sorry "hedge"). I checked market data for the oct 2013 shutdown. From the start the market dropped just 1.66%, before jumping to ~3% above start value when it was resolved 2 weeks later. The largest drop in the weeks before was just 2.7%
https://goo.gl/B6Rs8t
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I would rather take the opposite of that trade: sell the far OTM calls at the same delta as you would the puts. This changes the trade from a 90% probability of small loss to 90% probability of small win. Although honestly I'd do neither. If I wanted some slight downside hedging I might buy a spread or butterfly, and make sure I'm not paying extrinsic value for it.
I personally will wait until it gets closer and see what the market is doing then. If volatility is up because of uncertainty then I'll be selling volatility (via short strangles). If vol is down and I want to take a shot/hedge I might do a VXX covered call. But I don't want to pay for a low probability trade.
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I'm probably asking the wrong crowd considering "hedging" is equated with "gambling" here.
So you're placing a "bet" that in most cases will loose you money, but in the case of an unlikely event you will win a large sum? Uhm, sorry this is different from gambling how?
BTW; not sure I see the basis for this bet (sorry "hedge"). I checked market data for the oct 2013 shutdown. From the start the market dropped just 1.66%, before jumping to ~3% above start value when it was resolved 2 weeks later. The largest drop in the weeks before was just 2.7%
https://goo.gl/B6Rs8t
Don't you have insurance policies? Gambler.
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I've decided against the hedge. Historical research shows the worst the market has ever dived post shutdown is a little over 4%. It isn't enough to need protection against. I'll just use the post event boost to risk premium to write puts on things I already want to own.
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It sounds like Trumps administration has a temporary plan in place to keep the government running even if no long term budget agreement is made, so it sounds like there won't be a shutdown. That's usually what happens, because it looks horrible for everyone when the government actually does shut down. They usually just drag their heels ad nauseum.
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I dont buy life insurance either.
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meh, you are not really proposing a hedge. You want to short the S and the P because that darn little trumpskey is going to do something you don't like.
emotions are how you loose money trading.
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Another choice I've been thinking about is you could do a "Poor Man's Covered Put." Buy a deep ITM put in a back month, and sell OTM puts in the front month. It still doesn't look too feasible that far out to Dec, but I'm considering doing one maybe for June/July or June/Aug, e.g.: Buy SPY July 255, sell SPY June 233 puts. Costs around $16 today. Max profit = 255-233 = 22 - $16 = $6. Max loss $16 (if SPY rallies past 255). Gives you around -45 deltas of downside hedge.
I don't love calendars; I've had mixed results. I find them fairly slow to profit, but not very risky either. Just trying to offer some ideas.
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I've decided against the hedge. Historical research shows the worst the market has ever dived post shutdown is a little over 4%. It isn't enough to need protection against. I'll just use the post event boost to risk premium to write puts on things I already want to own.
ya like i said, i think the market(s) didn't react too negatively in past shutdowns.
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Trump is constantly contradicting himself. He'll come out with a strong statement in one direction and then a few days later say the opposite and try to make it sound like everyone is so fortunate that he spared us his initial choice.
I wouldn't ever make a single choice on anything coming out of his mouth, and certainly not investing in a hedge
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I wouldn't ever make a single choice on anything coming out of his mouth, and certainly not investing in a hedge
Interestingly someone is making choices based ENTIRELY off what comes out of his mouth!
www.twitter.com/BOTUS
http://www.npr.org/sections/money/2017/04/07/522897876/meet-botus-planet-money-s-stock-trading-twitter-bot
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It's fairly simple to understand what Trump is saying. Kellyanne Conway told us, right? We can't listen to the literal words......we have to read what's in his heart.
Why do I feel like that's a line from fast and the furious?
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One of my liberal co-workers is just convinced that Trump will cause a 2001-style crash. He keeps moving into bonds.
Of course, he turned 60 this year, so he probably ought to have some bonds.
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So, I'm honestly curious Velociraptor. What would have been the outcome had you taken the gamble?
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So, I'm honestly curious Velociraptor. What would have been the outcome had you taken the gamble?
I didn't check the results but it would have been trivial. That was by design. Had I bought long dated puts, any small change in the market would result in a trivial movement in the Time Value remaining.