Author Topic: Flip side of the index fund approach  (Read 6364 times)

Random

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Flip side of the index fund approach
« on: February 02, 2014, 02:08:44 PM »
Here is a quote poster from another forum I frequent:

       "I intend on useing stock market devices to be in a position that opposes most investors. To be in this position will cost a small known amount each year (say $1000) that I will most probably lose if the market does what most investors want, which is to appreciate in value. When a major correction comes because investors are paying too much for not very useful assets, we'll my $1000 could turn into 15k or 150k or 1.5mil, depending on the severity of the correction. This gives me a known small risk and an unlimited upside, quite the opposite of the risk profile of the 30 year, capital appreciation, boglehead model. When my opposing position becomes profitable I will then use the proceeds to buy assets that return a decent yearly return (like property). "

Can somebody educate me on what this approach is called so I can do some research and better inform myself?  Also, any opinions or commentary?  It sounds like another good way to lose money unless you are really picking your buys well.

Thanks,
Rand

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Re: Flip side of the index fund approach
« Reply #1 on: February 02, 2014, 02:51:12 PM »
If someone can reliably turn $1,000 into $15,000 (or even $1.5 million?!) then I don't think they would be spending much time on an internet forum telling people about it.
« Last Edit: February 02, 2014, 02:53:50 PM by Grateful Stache »

c12mintz

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Re: Flip side of the index fund approach
« Reply #2 on: February 02, 2014, 02:51:59 PM »
There are ways to 'hedge' your portfolio like this, but the $1k to $150k or $1.5M is more like a dreamworld.

There are tons of ways to hedge your portfolio against a massive correction though, here's an example:

You could buy puts (right to sell) with a strike of $163 for the SPY (proxy of the S&P 500 / roughly 10% / so $1782=$178.20)  that expire in June 2014 for around $3 each (300 contracts for $900). If the market goes down 10% between now and June, you break even, but let's say the market nosedives by 25%, unlikely, yes, but possible, yeah definitely possible. Remember the market went up almost 30% last year.

Well if the market goes down 25%, the S&P will now be $1336, or $133.60 for the SPY. Your 300 puts are now worth [300*(163-133.60)] $8,820.

That's one example where the user could make a 10x gain on an 'unlikely but still possible' event.

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That said, this type of behavior over the long-term will really reduce your returns. For the average investor, it's better to just dollar-cost average into indices and not try to 'time the market.'

warfreak2

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Re: Flip side of the index fund approach
« Reply #3 on: February 02, 2014, 02:58:14 PM »
However, SPY can't go further down than $0, so the gains aren't "unlimited". In the unlikely event of armageddon, you would get paid the maximum 300*$163 = $48,900, and it's not clear what would be left to spend it on.

Theoretically, you could buy infinitely many puts, with strike prices of $163, $163/2, $163/3, $163/4, $163/5... which have an infinite sum, but because each is exponentially less likely to end in-the-money, the prices of the puts total a finite amount. I don't know of a broker which will sell infinitely many puts, though.
« Last Edit: February 02, 2014, 03:05:17 PM by warfreak2 »

Richard3

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Re: Flip side of the index fund approach
« Reply #4 on: February 02, 2014, 03:14:57 PM »
Hmm, out of the money puts has been covered and sounds like that's his plan. Maybe the plan is heavily out of the money close expiry puts and doubling down if he's right?

I would guess he's a more-deluded-than-regular goldbug but he talks of losing the $1000.


My suggestion is that he's betting on binary options (down obviously) and doubling down if he's right.

1k -> 2k -> 4k -> 8k -> 16k -> 32k -> 64k -> 128k -> 256k -> 512k -> 1124k
jan - feb - mar - apr-> may -> june -> july -> sept -> Oct --> Nov --> Dec

There we go, a million by the end of the year, a million and a half is in reach if he takes worse than even money on a couple of them. 12 down months in a row and this guy is FI.

kyleaaa

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Re: Flip side of the index fund approach
« Reply #5 on: February 02, 2014, 04:03:20 PM »
By definition, short strategies can not experience unlimited gains since the worst case scenario is that everything goes to zero. I would interpret that comment as hard evidence the person has no idea what they're talking about.

I'm also not sure what world this guy lives in where property will continue delivering decent returns while the rest of the economy crumbles around him.
« Last Edit: February 02, 2014, 04:05:41 PM by kyleaaa »

Jamesqf

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Re: Flip side of the index fund approach
« Reply #6 on: February 02, 2014, 04:08:42 PM »
Could someone please explain how these option strategies differ from say betting your money at the craps table?  Except that the casinos usually give you free drinks :-)

KingCoin

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Re: Flip side of the index fund approach
« Reply #7 on: February 02, 2014, 04:15:40 PM »
Could someone please explain how these option strategies differ from say betting your money at the craps table?  Except that the casinos usually give you free drinks :-)

Exactly. Alternatively, you could just play the lottery. Your downside is $1, your upside millions!

Downside options usually trade at a high vol premium, so unless you have a crystal ball, buying them is unlikely to be a fruitful strategy.

Random

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Re: Flip side of the index fund approach
« Reply #8 on: February 02, 2014, 06:33:10 PM »
Thanks gang.  This gives me enough info to be able to research and enough perspective to be able to ignore this investment 'strategy'.

foobar

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Re: Flip side of the index fund approach
« Reply #9 on: February 02, 2014, 06:52:32 PM »
Isn't that they best way to make money with these strategies? Sign up for my newsletter and I will give you all the details.

Yes buying and selling options is a legit trading strategy. I am not sure if any deal has every turned 1k into 1.5million (or even 150k). Turning 1k into 15k sounds great and is somewhat reasonable. The part that is left off is that you have play ~7 times (i.e. invest 7k to make 15k) to get that result. Now your making just over 10% which is about the same as stocks.

If someone can reliably turn $1,000 into $15,000 (or even $1.5 million?!) then I don't think they would be spending much time on an internet forum telling people about it.

Jamesqf

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Re: Flip side of the index fund approach
« Reply #10 on: February 02, 2014, 09:22:24 PM »
Yes buying and selling options is a legit trading strategy. I am not sure if any deal has every turned 1k into 1.5million (or even 150k).

Yeah, and every week the electronic billboards outside the casinos feature pictures of people who won $XX thousand (occasionally a million or so).  Yet for some strange reason those casinos don't seem to go bankrupt very often, even with all the free drinks they hand out :-)

foobar

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Re: Flip side of the index fund approach
« Reply #11 on: February 03, 2014, 06:44:00 AM »
  It is pretty reasonable to use option instruments to make 10-20% (note that your risk goes way up) long term using various trading strategies. That is a heck of a lot different than turning 1k into 1 million in a couple of trades.

Yes buying and selling options is a legit trading strategy. I am not sure if any deal has ever turned 1k into 1.5million (or even 150k).

Yeah, and every week the electronic billboards outside the casinos feature pictures of people who won $XX thousand (occasionally a million or so).  Yet for some strange reason those casinos don't seem to go bankrupt very often, even with all the free drinks they hand out :-)

Chuck

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Re: Flip side of the index fund approach
« Reply #12 on: February 03, 2014, 03:42:57 PM »
Is this a penny stock question? Because this is the argument people use to push penny stocks. It's bad.

KingCoin

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Re: Flip side of the index fund approach
« Reply #13 on: February 03, 2014, 04:39:05 PM »
Is this a penny stock question? Because this is the argument people use to push penny stocks. It's bad.

The original quote alluded to profiting off of market crashes, so I assume it's an option related strategy, though the same holds true for penny stocks.

Shor

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Re: Flip side of the index fund approach
« Reply #14 on: February 03, 2014, 06:21:48 PM »
While buying puts might be their strategy, it also means that if the stock market fails to drop enough by the desired timeframe, he would be out of the initial principal. It's possible he'll try something a bit more conservative for longevity of his initial principal:

http://www.theoptionsguide.com/put-backspread.aspx

While it may have slightly higher commissions, and a wider chance of loss if the price ends up staying around the initial entry level, such a "strategy" would actually limit his loss from upside market movement enough to play the game several times over with the initial principal until the commissions and collective price eats away at his initial investment.

The other issue is that his options will suffer with time depreciation, which means the stock market will need to collapse that much more below his entry level to make up for the cost in time.

Not saying it's a viable "strategy".. just saying it would hold up longer (though have less upside final profit) against an ongoing bull movement...
This would actually fit in with his 'cost analysis' in that it only eats away at a portion of his investments each year as he gambles against the stock market each year.

bacchi

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Re: Flip side of the index fund approach
« Reply #15 on: February 03, 2014, 07:05:13 PM »

1) Buy treasuries for the "margin" requirement of the puts and for a little income while you wait.
2) Buy VIX far OTM calls and sell far OTM puts on the Chicago future. VIX went up 16% today.
3) Wait for a 1929/1987/2008 crash.
4) Profit.


Richard3

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Re: Flip side of the index fund approach
« Reply #16 on: February 05, 2014, 02:28:04 PM »
Oooh, the VIX, I forgot about that. I think you'd struggle to get a  1000x return though no matter how far OTM you went.