FUEGO
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- Joined
- Nov 13, 2007
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Sorry for the spam-like title!
Does anyone take a very small percentage of their portfolio and use it to strategically make small bets that a bubble will collapse? Or I suppose you could take a similar bet that there is an inverse bubble (ie an asset has over corrected on the down side).
I think this strategy was basically what Taleb was using and described in his book (which I have yet to read). Essentially making bets on the fat tails of the curve.
Here is what I'm describing with example values.
Say you have 500,000 in your portfolio. Taking 1%, or 5,000 each year and putting it on some way out of the money puts or calls on a bubble asset or assets. The percentage could be less or a little more depending on your risk appetite. Trimming 0.5-1% off of the return of maybe 7-10% a year isn't a huge sacrifice to occasionally get a big winner (either by the option going into the money or by the option itself increasing in value significantly).
Assets I thought about "shorting the bubble" on before: oil and china right before their respective crashes. Didn't act on any of it. May not have made any money if I would have since so much is dependent on timing (ie luck). Currently I'm eying gold as a candidate for one of these wild bets.
For example the GLD Jan 2011 and Jan 2012 70 puts were roughly $0.85 and $2.25 earlier today (underlying trading around 110-111 at the time). A big movement on GLD downwards could make these inflate big time. And you have 1-2 years before these options can expire worthless.
I know the basics of options - price declines over time due to decay; price moves up/down along with volatility/risk in the market. You could still lose money on these way out of money options even with a big market movement in the underlying asset in your favor.
And to some extent, you have to time these transactions. When something is particularly bubbly and/or vix is low and options are cheaper, maybe you are willing to make larger bets (ie buy what is cheap). During highly volatile times or where nothing appears particularly bubbly, you don't buy or buy little.
There just seems to be so many times when you look at something, smell a fish, and want to put your money where your mouth is, but I don't want to do anything too crazy and place a significant portion of the portfolio at risk.
Anyone doing something like this and care to share how it's going, tips, tricks, caveats?
Does anyone take a very small percentage of their portfolio and use it to strategically make small bets that a bubble will collapse? Or I suppose you could take a similar bet that there is an inverse bubble (ie an asset has over corrected on the down side).
I think this strategy was basically what Taleb was using and described in his book (which I have yet to read). Essentially making bets on the fat tails of the curve.
Here is what I'm describing with example values.
Say you have 500,000 in your portfolio. Taking 1%, or 5,000 each year and putting it on some way out of the money puts or calls on a bubble asset or assets. The percentage could be less or a little more depending on your risk appetite. Trimming 0.5-1% off of the return of maybe 7-10% a year isn't a huge sacrifice to occasionally get a big winner (either by the option going into the money or by the option itself increasing in value significantly).
Assets I thought about "shorting the bubble" on before: oil and china right before their respective crashes. Didn't act on any of it. May not have made any money if I would have since so much is dependent on timing (ie luck). Currently I'm eying gold as a candidate for one of these wild bets.
For example the GLD Jan 2011 and Jan 2012 70 puts were roughly $0.85 and $2.25 earlier today (underlying trading around 110-111 at the time). A big movement on GLD downwards could make these inflate big time. And you have 1-2 years before these options can expire worthless.
I know the basics of options - price declines over time due to decay; price moves up/down along with volatility/risk in the market. You could still lose money on these way out of money options even with a big market movement in the underlying asset in your favor.
And to some extent, you have to time these transactions. When something is particularly bubbly and/or vix is low and options are cheaper, maybe you are willing to make larger bets (ie buy what is cheap). During highly volatile times or where nothing appears particularly bubbly, you don't buy or buy little.
There just seems to be so many times when you look at something, smell a fish, and want to put your money where your mouth is, but I don't want to do anything too crazy and place a significant portion of the portfolio at risk.
Anyone doing something like this and care to share how it's going, tips, tricks, caveats?