Best way to short the equity market

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software
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Re: Best way to short the equity market

Post by software » Sun Mar 04, 2018 10:30 am

Please document your specific ins and outs of the market, as you are making them, in the thread.

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happyisland
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Re: Best way to short the equity market

Post by happyisland » Sun Mar 04, 2018 10:47 am

software wrote:
Sun Mar 04, 2018 10:30 am
Please document your specific ins and outs of the market, as you are making them, in the thread.
Yes, please do! I think it would be very interesting to follow along with your (hopefully winning) investment strategy.

noraz123
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Re: Best way to short the equity market

Post by noraz123 » Sun Mar 04, 2018 10:54 am

b0chatma wrote:
Sat Mar 03, 2018 6:28 pm
...
Diversification into multiple index funds won't save me from a multi-year bear market (systematic risk/market risk) it will only reduce my Unsystematic risk.
If you want to remove yourself from systematic risk, one option would be to get out of the system - don't hold any equities. While not as profitable as shorting in a down market, certainly safer.

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Peter Foley
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Re: Best way to short the equity market

Post by Peter Foley » Sun Mar 04, 2018 11:12 am

There have been a number of posts suggesting buying puts (mine being one of them). If you are trying to time the market and expect a downturn this is the safest way to do it as it limits exposure. The most you will lose is the cost of the puts when they expire.

IMHO buying a put on an index when you hold the index is a form of hedging, while shorting a market index is more akin to gambling.

After a few years of options trading and sleepless nights I gave up on that approach to investing.

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Doom&Gloom
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Re: Best way to short the equity market

Post by Doom&Gloom » Sun Mar 04, 2018 11:19 am

lws6772 wrote:
Sat Mar 03, 2018 5:40 pm
Tycoon wrote:
Sat Mar 03, 2018 5:27 pm
You'll shoot your eye out.
Or maybe even, "you'll short your eye out."
Well done!
bottlecap wrote:
Sun Mar 04, 2018 10:13 am
I’d rather sit blindly than run around blindly.

I predict this will be a thread that will have 7 pages of posts by 2023.

JT
This thread could have 7 pages by the end of this week.

Good luck to OP, but I am (literally) betting against him.

danaht
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Re: Best way to short the equity market

Post by danaht » Sun Mar 04, 2018 11:28 am

You can always open a margin account and open a short-sell order for an ETF like VOO, or VTI. I would not recommend this - you will probably lose an unlimited amount of money!

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nedsaid
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Re: Best way to short the equity market

Post by nedsaid » Sun Mar 04, 2018 1:00 pm

b0chatma wrote:
Sun Mar 04, 2018 9:45 am
I agree that shorting has worse odds than going long when you look at doing it over the long run. I think shorting can be done successfully in very select instances when the market is extremely expensive. I definitely don't think you should just sell short and hold on to it. You have to have an entry and exit strategy which allows you to hold on for long-term gains or get out at a reasonable loss if the market goes against you.

Nedsaid: There is an investing mentality, which is to buy good investments and hold them for a long time. Pretty much you own stocks as a proxy for owning your own business, REITs as a proxy for owning Real Estate directly, and bonds as a proxy for being in the lending business yourself.

Traders on the other hand seek to exploit market inefficiencies. In the day of Math PhD's and super computers, these inefficiencies don't last very long. There are people who trade professionally and do well at it but it is an entirely different mentality than that of a long term investor. Not quite a gambler's mentality but with many similarities. Pretty much, you need to have a good idea of the odds. Many fewer successful traders than successful investors.


People are so strongly against market timing but we all do it to some extent. Most people don't go completely dollar cost averaging. For example lets say I just received a windfall amount of $1mm and before that, I had 0. Would any of you recommend putting all of this money to work right now in this bond or equity market? We are in a rising interest rate environment which means prices for bonds are going to continue to get creamed. It's much smarter to wait until the yield curve flattens or inverts and the 10-year treasury curve hits +5% before you start buying long bonds again. That's market timing.

Nedsaid: I know I have admitted to market timing in its mildest forms. Pretty much, I try to take advantage when assets get cheap. But even that is hard to do.

For equities why would you buy equities right now with that windfall when the average S&P PE ratio is +32. Buying at an average PE of +32 means that you are locking in an average return on equities of 3.125% year at that rate (ex. 1/32 = .03125). Who would do that? Warren from a value investing perspective that's just crazy to buy that expensive. You wait until the market pulls back and PEs get cheap and by then. a PE of 15 would return on average double what the 32 would. Double return compounded over 20 years results in a massive difference.

So trend following and value investing both "times" the market technically. Yes, value investing doesn't even pay attention to price "Mr. Market" but value investors do time the Price multiples such as P/E and P/book.

Nedsaid: Don't quite agree with that. There are at lease three of definitions of Value.

One is the academic definition where you buy the 30% of the market that is cheapest using such benchmarks as Price/Earnings, Price/Book, Price/Cash Flow. Dimensional Fund Advisors have tweaked the academic model by setting momentum to neutral. Value tends towards negative momentum.

The second definition is a bottoms up approach of looking company by company and calculating intrinsic value for each company. You put in a "margin of safety" by buying companies whose intrinsic value is higher than current market value. This is the Benjamin Graham approach.

A third variation is Warren Buffett. He uses the Graham approach but also takes into account the quality of the company. Quality companies have consistent earnings growth and strong balance sheets. As his partner Charley Munger would say, "It is better to buy a great company at a good price than a good company at a great price."

Value investors really don't time the market as such but I will say that they will find more opportunities when markets are relatively cheap than when markets are relatively expensive.


Are there any value investors in this chat? If so, are you buying now?

Nedsaid: My income has fallen enough that I am not adding to investment accounts right now. As money comes available I buy into such things as International Developed and International Emerging Stock Markets which are both cheaper than US Stocks. I have bought into individual stocks like Coke (which is an expensive stock), Ford, and Gilead Sciences. Ford and Gilead were cheap stocks when I bought them. Ford is still dirt cheap. I am buying Investment Grade Intermediate Term Bond funds and TIPS as I rebalance from stocks to bonds. Since the market has had a recent drop, I have suspended the program of stock to bond rebalancing.

Also are there any investors in this chat that bought at the highs of the 99' tech boom/bust and held it? When it comes down to it you can just look at PE ratios and say that prices are expensive and that I'm not a buyer here. Is it aggressive to consider selling short these prices once the trend turns down? Yes, but isn't it also aggressive to consider sitting on your hands or worse riding the unknown for possibly a multi-year bear? Time value is important to consider as well. If you are making negative returns for the next 7 years which is what the GMO predicted forecast has us making in the equity market and bond market.

Nedsaid: I did not chase the hot tech and internet stocks during the 1990's boom. I did take a bath in Lucent and Nortel during the 2000-2002 bear market. I sold Lucent to buy Nortel and that didn't work out. I sold Nortel before it went bankrupt. Those were exceptions to my more cautious value approach. I also owned shares of Hewlett-Packard which I rode both up and down. My portfolio losses during the 2000-2002 bear market were about 32% with an 80% stock/20% bond and cash portfolio.

https://www.cmgwealth.com/ri/radar-equi ... Y.facebook

Who has time to sit for 7 years. Not only that but 1mm at the beginning of this period will be substantially lower at the end of that 7 years.

Was 2008-2018 a great time for the passive investor. Yes but when prices are this expensive how do you make a good return when prices are falling back to the mean or below (which takes years)? In my opinion, the only answer is to be active. Just a 2% difference in your portfolio a year over 20 years has a massive impact.

So knowing the probable outcome I can't sit and wait blindly as the trend turns down. Not at these P/Es. If the trend turns back up yes, sure keep riding equities but turning down at this level and being willing to ride that ride blindly. Yikes. That's a scary unknown.

My only question is what is the best investment during a multiyear bear. We all know it's not equities. Bonds are also in a bear so It's not bonds yet. Real estate is going to get hit just like bonds so it's not that. That doesn't leave to many options. Commodities which definitely require trend following and currencies which also require trend following. I don't like commodities because nearly all the ETFs use some type of derivative to track the underlying asset so you are always dealing with some type of contango or backwardation. Currencies are ok but for 100% of your portfolio allocation it doesn't make sense. So to me the best option I have right now is an allocation of T-bills, a little currencies (using trend following) and shorting equities (using trend following).

Nedsaid: My advice would be to increase your allocation to International Stocks a bit and decrease your allocation to US Stocks. International is cheaper now and if the US Dollar continues to fall, the wind will be at the back of those with International investments. I would also caution that US Stocks are less expensive than they appear. Accounting changes, particularly with the amortization of goodwill, has made the definition of earnings more conservative. Larry Swedroe says that these changes have added about 4 points to P/E ratios. So a forward P/E of 20 for the US Market would be more like 16 when measured with 1970 accounting standards. Another factor was the expensing of employee stock options, had this been in effect during the 1990's, the compelling earnings growth of tech companies would have looked a lot less compelling.

That being said, US Stocks are not cheap here.


Just my general thinking at the moment.
A fool and his money are good for business.

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arcticpineapplecorp.
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Re: Best way to short the equity market

Post by arcticpineapplecorp. » Sun Mar 04, 2018 1:18 pm

b0chatma wrote:
Sun Mar 04, 2018 9:45 am
I agree that shorting has worse odds than going long when you look at doing it over the long run. I think shorting can be done successfully in very select instances when the market is extremely expensive.
You're making an assumption it's "extremely" expensive. There have been many posts on bogleheads that have shown some experts consider the market to be not cheap...but not "extremely" expensive. In fact, some experts suggest higher p/e for the market are the new normal or new average. I.e. just because the p/e for the market "was" lower in the past, doesn't mean that "has to be" the average going forward. I'm sure someone can chme in with a link to the author who suggested that.
People are so strongly against market timing but we all do it to some extent. Most people don't go completely dollar cost averaging. For example lets say I just received a windfall amount of $1mm and before that, I had 0. Would any of you recommend putting all of this money to work right now in this bond or equity market? We are in a rising interest rate environment which means prices for bonds are going to continue to get creamed. It's much smarter to wait until the yield curve flattens or inverts and the 10-year treasury curve hits +5% before you start buying long bonds again. That's market timing.
If you read many posts on bogleheads you'll often see people talk about lump summing in instead of dollar cost averaging (according to one's allocation choice of course) because lump summing has tended to do better 2 out of every 3 years. But DCA is for those who want some "emotional insurance" from the possibility of being so unlucky to lump sum in one of those 1 out of 3 years the market goes lower.

"bonds are going to get cremed"?? Really. Doesn't it depend on whether you're holding short or long term bonds? The duration determines the volatility of the bond price so if you're worried about getting "creamed" just move to a shorter duration.

"start buying long bonds again"??? I don't buy long bonds and they're not often recommended here because of the extra risk and bonds are for safety, not risk (that's what stocks are for). So again, maybe you're not using bonds the right way in your portfolio or are choosing riskier bonds than you should be.

Also are there any investors in this chat that bought at the highs of the 99' tech boom/bust and held it? When it comes down to it you can just look at PE ratios and say that prices are expensive and that I'm not a buyer here. Is it aggressive to consider selling short these prices once the trend turns down? Yes, but isn't it also aggressive to consider sitting on your hands or worse riding the unknown for possibly a multi-year bear? Time value is important to consider as well. If you are making negative returns for the next 7 years which is what the GMO predicted forecast has us making in the equity market and bond market.
Couple of assumptions here. First, yes I started investing in the late 90s and have held til today. Never sold. But that's because I'm still a couple decades away from retirement, so why would I sell prior to retirement if that's what the funds are for? Secondly, just because the tech sector lost 70% or 80% (can't remember which) in the early 2000s, the broad market was down 40% over the same time period. So while bad, not AS bad as the tech sector you mention.
Who has time to sit for 7 years. Not only that but 1mm at the beginning of this period will be substantially lower at the end of that 7 years.
I do. As I said, my investments are for retirement. Since my retirement is 20+ years away, why would I be worried what happens to my investments over the next 7 years? If anything, I want prices to fall because I'm buying over the next 20 years. What happens over the next 7 years to the stocks I already own is immaterial provided they recover at least by the next 20+ years, which is probable.
Was 2008-2018 a great time for the passive investor. Yes but when prices are this expensive how do you make a good return when prices are falling back to the mean or below (which takes years)? In my opinion, the only answer is to be active. Just a 2% difference in your portfolio a year over 20 years has a massive impact.
You're thinking short term. Investing isn't done over "years". It's done over decades. Most start investing in their 20s or 30s. They retire in their 60s. That's 30-40 years of investment returns right there. You don't sell everything the day you retire. You may have 30%-50% in stocks throughout your retirement (recommended for most) while taking out 4% of the total portfolio per year. You may live to be 90 or 100 years old. That's another 30-40 years you'll be holding stocks in some part of your portfolio. If you add it all up, it means if you're lucky to start in your 20s and live to 100 that's 70 or so years to be investing in stocks. Now doesn't it seem kind of silly to be concerned what happens over the next 7 years? If you need the money in that time, it shouldn't be invested in stocks of course.
So knowing the probable outcome I can't sit and wait blindly as the trend turns down. Not at these P/Es. If the trend turns back up yes, sure keep riding equities but turning down at this level and being willing to ride that ride blindly. Yikes. That's a scary unknown.
Investing is unknown. That's why you expect a return that exceeds the return of riskless assets. Doesn't always work that way (I believe the rates of return between bonds and stocks were similar between 1980-2009 but you took far greater risk with stocks). But how often has that happened? Everything that will happen in the future is unknown. People thought bonds would go higher FOR YEARS, and they kept going lower. People thought stocks would go down FOR YEARS, and they haven't (yet). You build a portfolio that matches the need for risk, ability to take risk and willingness to take risk. Figure that out and the rest will take care of itself and you can stop worrying what the market "might" do. Because you'll never know what it "will" do until it's already done it.
My only question is what is the best investment during a multiyear bear. We all know it's not equities. Bonds are also in a bear so It's not bonds yet. Real estate is going to get hit just like bonds so it's not that. That doesn't leave to many options.
No it doesn't leave good options. When valuations are high for most asset classes, choices are not good. You can either go to cash, either selling assets you think are overpriced or setting aside new monies in cash instead of investing them (both of which are market timing and you may regret the decision if the investments you sell or don't buy continue to go higher in the meantime) or buy assets that are cheaper than others. Emerging market stocks are the cheapest of the bunch of equities right now. Or you can short the market (also market timing) which you're asking about. Considering the fact that you're concerned with the risk of the market maybe dial back the overall risk level of your portfolio, but don't compound risk through shorting the market.

Do you have an IPS? If not, you should write one immediately before you take any action:
https://www.bogleheads.org/wiki/Investm ... _statement
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

b0chatma
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Re: Best way to short the equity market

Post by b0chatma » Sun Mar 04, 2018 7:20 pm

Yeah, I've considered the foreign equity markets. I'm still considering it but here's the thing. Foreign markets (including emerging markets) are highly correlated to the US market. So when US stocks go into a bear market you are likely to see these foreign equities drop in value as well. Is it a good option right now as stocks continue to go up? Maybe for a piece of the portfolio but when we go into a bear market they are going to get smacked to the downside as well. So what does that give me? Just a little more downside protection.

I don't like leverage and I don't like derivatives (other than covered calls) so I'm not sure how I'll approach this yet. Lots to contemplate. However, I have no doubt that when the trend turns down. Using the SPY 7 month EMA as my exit I'll be out. Could I get whipsawed a time or two before we see a large correction/bear market? Yes, but the cost of "insurance" is going to be much less than the cost of a multi-year bear. If I can find an efficient investment vehicle I'll short it. At least 25% of my portfolio.

Here is another issue I've been mulling over that could be interesting to you Bogleheads.

With Indexed ETFs that have allowed the masses to take on a very passive investing approach where you put in 1mm in capital into a diversified portfolio of index ETFs and the ETFs unbiasedly distribute those funds to the underlying assets within the index. Has anyone thought about how much this is overvaluing bad companies? I say that because back in the day people would have to deliberately buy individual stocks. What they believed to be good companies and as a result that demand would result in a higher stock price (simply stated). Now with Indexed investing you are technically investing in a number of trash companies with debt through the nose, poor earnings, and ROE, as well as enormous PE ratios and their prices and PEs continue to climb because they are getting bought up by these index ETFs.

So during long bull markets like this "all ships" are rising and you are getting a lot of extremely expensive stocks. Now when this flips and these index ETS start selling you will get the opposite effect. Index ETFs are not going to be selective about what they sell. They are going to be putting selling pressure on bad companies and good. What is this going to do in a deep bear market? I believe it's going to create an environment where it pays to be a value "stock picker" again. Good companies will be beaten down well below where they should, due to the unbiased selling of index ETFs.

I think it's going to be an interesting opportunity from a contrarian point of view since everyone is on the index ETF bandwagon you have to start questioning the fact that now that "everyone" is doing approach is it the right place to be.

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arcticpineapplecorp.
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Re: Best way to short the equity market

Post by arcticpineapplecorp. » Sun Mar 04, 2018 9:58 pm

Most of us admit we don't know more than the market. You seem to believe you know better. If so, have the courage of your convictions and take the appropriate actions. If not, simply own the market.

I suggest you read the following post by Homer J. If this doesn't tell you over the long term things tend to work out (so why are you worrying about the short term?)...Then I don't know that anything will.

viewtopic.php?f=10&t=229429&start=50#p3567987
HomerJ wrote:
Wed Oct 11, 2017 12:22 am
Sure, if you could just invest in stocks during the good times, and avoid stocks in the bad times, you'd make more.

But there are too many variables to make predicting the stock market possible. A single variable like PE ratio is not enough. PE ratios have been historically high since 1992. (Since 25 years is a big chunk of history now, the current PE ratios are becoming less and less "historically high" and more and more "historically normal").

But here's the thing.. The long-term stock market returns of 10% a year INCLUDE the crashes. Read that again. You didn't have to avoid the crashes to make a ton of money in the stock market in the past.

If the money is earmarked for retirement, long-term money, just buy and hold and stay the course.

Put some in bonds to help you sleep at night (I'm 50/50 stocks/bonds), and just leave it alone. Jumping in and out of the market, you are far more likely to under-perform the market than beat it.

Timing the market is hard. Here's an example. The Shiller PE10 ratio crossed 25 in 1996. The Shiller PE10 had never crossed 25 before that except in 1929.

A total signal to sell, right? The S&P 500 was in the low 600s in 1996. It more than doubled again to 1500 by 2000 before crashing back to the 800s. Anyone who got out in 1996 was never able to buy back in cheaper.

And today it's at 2550, more than 4x what it was in 1996. And that's just the price. You also got 2% dividends each year. $10,000 invested in 1996 is worth $64,000 today... 6.4x what you invested, or a 9.3% annualized return.

Buying in 1996, right when the PE10 ratio was the highest it had ever been since the Great Depression turned out to be great time to buy, not to sell.

Weird, right? Just set a conservative allocation (70/30 or 60/40 or 50/50 stocks/bonds), and stay the course. Slowly move more and more to bonds to protect your investments as you get closer to retirement.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

b0chatma
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Re: Best way to short the equity market

Post by b0chatma » Sun Mar 04, 2018 10:25 pm

That idea works until it obviously doesn't. The idea is based off the US equity market. Use that logic for another market such as the Nikkei 225 which made its last high in 1989 and you would have a different perspective. Don't get me wrong I agree that this is a marathon and not a sprint and I believe that the more you transact in your accounts the worse the results. I just don't agree with some of the concepts of buy and hold.

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Re: Best way to short the equity market

Post by ryman554 » Mon Mar 05, 2018 9:22 am

anoop wrote:
Sat Mar 03, 2018 6:00 pm
I had to check the date just to make sure it wasn't April 1. :D

Shorting requires getting 2 things right -- you have to decide how low the market will go and in what time frame. Getting either one wrong means you lose. Many bearish funds closed shop waiting for the market to drop.

The easiest vehicles to lose your money are the inverse ETFs, e.g. SDS, DXD, etc.

If you have to ask how to short, you probably shouldn't be doing it.
I hate to ask, but why is this any different than "longing" the market, as long as you are using "shorting" as your entire strategy. Other than shorting can make you no more than 100% of your initial investment.

Of course, you would have to assume the market will only go down from here on out, but after that, the decision to go long or go short should not be any more reliant on timing.

Now, if the investor was using shorting as a market timing strategy because valuations are "high", that is no different than all of the tactical changes folks do when buying stocks. Or going to cash. Again, shorting shouldn't really be singled out here, but should fall in the same category of "market time = bad" advice we give out daily -- especially days that are not April 1.

<edit>: and I now see that the investor was, indeed, timing the market. I would suggest the OP read a couple of real-life threads that attempted to balance long vs short based on some moving average. Did not end well. I would suggest that the OP carefully plan a strategy and see how it really worked using real data -- without looking at that data beforehand. And it it magically worked, the OP should realize that far smarter folks with far greater access to $$ probably have already taken the alpha out of that idea. But, it's the OP's money, and I, for one, would appreciate the running commentary about a contrarian boglehead strategy.

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greg24
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Re: Best way to short the equity market

Post by greg24 » Mon Mar 05, 2018 9:40 am

The market can remain irrational longer than you can remain solvent.

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Re: Best way to short the equity market

Post by Valuethinker » Mon Mar 05, 2018 9:46 am

In the UK you can do this using Contracts For Difference (CFDs)

As a bonus, gains on CFDs don't pay CGT tax. They count as gambling winnings. And you don't pay Stamp Duty (which you do pay on purchases and sales of shares).

The CFD trading firms will presumably avoid having American clients. And they do warn you "you can lose more than the amount invested".

What's the position in the USA?

Can you trade CFDs?

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Re: Best way to short the equity market

Post by Valuethinker » Mon Mar 05, 2018 9:50 am

b0chatma wrote:
Sun Mar 04, 2018 10:25 pm
That idea works until it obviously doesn't. The idea is based off the US equity market. Use that logic for another market such as the Nikkei 225 which made its last high in 1989 and you would have a different perspective. Don't get me wrong I agree that this is a marathon and not a sprint and I believe that the more you transact in your accounts the worse the results. I just don't agree with some of the concepts of buy and hold.
It is the problem that Schleifer wrote about - arbitrage has limits. You don't have infinite time, nor do you have infinite borrowing capacity.

Japan was clearly in a bubble from at least 1987, if I recall correctly. But it went up a long way from the Crash of 1987 to its final peak. WIping out many a speculator.

Note The Big Short. Michael Bury got called by his investors. It was only his stubborn nature that made him hold on (and the presumed torpor of the US legal system - what if a judge had warranted a seizure of assets?) when his investors sued to get their money back.

You've presumably seen interviews with Jim Charnos at Kynykos Investments? If shorting were easy, we'd all do it. Swensen talks you through the Shorts and investing with them. And Kynykos has had poor performance, recently.

Ironically it's not Bill Ackman's shorts (Herbalife) that have really hurt him, it was one of his longs (Valleant).

b0chatma
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Re: Best way to short the equity market

Post by b0chatma » Mon Mar 05, 2018 9:57 am

greg24 wrote:
Mon Mar 05, 2018 9:40 am
The market can remain irrational longer than you can remain solvent.
Yes we've all heard this. irrational goes both ways up and down and affects those mostly who are leverage and those that do not have an exit strategy.

The strategy that I was considering this short position is a trend trading strategy which uses a 7 month EMA. It is not an irrational market that continues to go up that is the problem with this. A flat market that trades in a range which creates a number of whipsaws and no long term trend is the problem.

In regards to shorts I generally don't like them. The market stays above it's 200 day moving average about 2/3s of the time.

The more expensive the market gets the greater the probability that there will be a large correction to the down side. At this point the odds are well in favor of a bear market than a bull. I'm not predicting. I'm just looking at probabilities based on the information we have right now to determine if I should consider a short once the trend turns down.

From the buy and hold perspective short term probabilities are not considered. That's fine. It's ok to have that approach if you are ok with the large draw downs.

My issue is that I don't like large draw downs and I also don't like passive returns (i.e. 6-8%). So I lean more to the aggressive trend trading approach and I mix in value investing once prices drop to a level where I can find deals. My intent is still to hold on to a trade for as many years as I can.

b0chatma
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Re: Best way to short the equity market

Post by b0chatma » Mon Mar 05, 2018 10:02 am

b0chatma wrote:
Mon Mar 05, 2018 9:57 am
greg24 wrote:
Mon Mar 05, 2018 9:40 am
The market can remain irrational longer than you can remain solvent.
Yes we've all heard this. irrational goes both ways up and down and affects those mostly who are leverage and those that do not have an exit strategy.

The strategy that I was considering this short position is a trend trading strategy which uses a 7 month EMA. It is not an irrational market that continues to go up that is the problem with this. A flat market that trades in a range which creates a number of whipsaws and no long term trend is the problem.

In regards to shorts I generally don't like them. The market stays above it's 200 day moving average about 2/3s of the time.

The more expensive the market gets the greater the probability that there will be a large correction to the down side. At this point the odds are well in favor of a bear market than a bull. I'm not predicting. I'm just looking at probabilities based on the information we have right now to determine if I should consider a short once the trend turns down.

From the buy and hold perspective short term probabilities are not considered. That's fine. It's ok to have that approach if you are ok with the large draw downs.

My issue is that I don't like large draw downs and I also don't like passive returns (i.e. 6-8%). So I lean more to the aggressive trend trading approach and I mix in value investing once prices drop to a level where I can find deals. My intent is still to hold on to a trade for as many years as I can.
I agree it's not easy and the investments are not attractive. That is the reason why I asked to see if anyone had any other suggestions that I may have missed. If shorting was no different than going long I wouldn't be raising the question. Since it isn't I contemplate the opportunity.

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greg24
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Re: Best way to short the equity market

Post by greg24 » Mon Mar 05, 2018 10:09 am

b0chatma wrote:
Mon Mar 05, 2018 9:57 am
irrational goes both ways up and down and affects those mostly who are leverage and those that do not have an exit strategy.
Good thing you have an exit strategy.

Please post your trades in real time.

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Re: Best way to short the equity market

Post by music_man » Mon Mar 05, 2018 10:27 am

As others have mentioned, I think the simplest way to do it would be to buy put options on the market whether it be the S&P or a broader market index. The only downside is the cost of the put option itself. There are also a multitude of combination option strategies you could employ. One common one is a bear spread, where you buy put options at a strike price of say, $100 on the market index. Then, you sell put options at a lower strike price say $90. The nice thing is the cost of the $100 option is partially offset by the sale of the $90 strike price option. The trade off, is you limit your profits to $10 (the difference between the $100 and $90). Many other strategies similar to this exist where you can use combinations of options to accomplish your goal based on your perception of the market.

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Re: Best way to short the equity market

Post by b0chatma » Mon Mar 05, 2018 10:47 am

music_man wrote:
Mon Mar 05, 2018 10:27 am
As others have mentioned, I think the simplest way to do it would be to buy put options on the market whether it be the S&P or a broader market index. The only downside is the cost of the put option itself. There are also a multitude of combination option strategies you could employ. One common one is a bear spread, where you buy put options at a strike price of say, $100 on the market index. Then, you sell put options at a lower strike price say $90. The nice thing is the cost of the $100 option is partially offset by the sale of the $90 strike price option. The trade off, is you limit your profits to $10 (the difference between the $100 and $90). Many other strategies similar to this exist where you can use combinations of options to accomplish your goal based on your perception of the market.
Yeah I agree I think the best option so far is to do leaps that are well in the money so that the delta is high enough to track the underlying.

I like covered call strategies but I'm not comfortable with bear spreads.

The reason why is that in the equity market price drops significantly faster than prices rise in Bull markets. The intent is to get into the trend for the long term. With the bear spread, the sold put will likely get exercised if the down trend results in a bear market. The goal is asymmetric returns. Your loss is only a fraction of your gain if the trend is long enough. Thanks for the suggestion. I'm sure some people will be interested in this approach but for me it's not the right fit.

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Re: Best way to short the equity market

Post by itstoomuch » Mon Mar 05, 2018 10:51 am

OP, how old are you?
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Best way to short the equity market

Post by b0chatma » Mon Mar 05, 2018 10:58 am

itstoomuch wrote:
Mon Mar 05, 2018 10:51 am
OP, how old are you?
36.

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Re: Best way to short the equity market

Post by itstoomuch » Mon Mar 05, 2018 11:22 am

I looked into straddles and strangles in early 2008, age 58/61 and on verge of retirement.
Options are difficult if most of your funds are in IRA, Roth, and 401, as was ours. You also had to hold the correct fund_Index to have option liquidity.
I did GLWB annuities which functioned as straddles and strangles.
I also looked into holding cash, but was too bound up into "stay-the-course" and "market timing".
YMMV
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Re: Best way to short the equity market

Post by b0chatma » Thu Mar 22, 2018 3:59 pm

A timely read for any of you who would be interested in "skipping" the next bear market.

These two write ups are quick reads and simple to implement as a retail trader. The strategy delivers equity returns with bond like risk. Good luck

White paper:
https://papers.ssrn.com/sol3/papers.cfm ... _id=962461
https://papers.ssrn.com/sol3/papers.cfm ... id=1585517

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Re: Best way to short the equity market

Post by JBTX » Thu Mar 22, 2018 4:24 pm

Alexa9 wrote:
Sat Mar 03, 2018 10:42 pm
Have you seen "The Big Short?" It's not a terrible idea and I wouldn't be so quick to dismiss OP's idea. We assume that the market will always trend upwards. There was another poster that did tactical asset allocation when the market swung that was also brushed off as a Motley Fool Market Timer type but if you think you can predict the market then more power to you. I wouldn't bet a lot on it but protective puts may be useful to protect the downside. I would simply shift to a slightly more conservative allocation after a long bull market.
My take wasn’t exactly the same from that movie.

Even though the characters were ultimately right, it darn near killed them. It takes a lot of conviction to take and hold a short position and it could ultimately wipe you out. You may be “right” but it could take everybody else years to figure out they are “wrong” and your short position gets battered in the interim.

Shorting isn’t about being fundamentally correct. It is about being able to sense when the herd is running at full throttle and about to run over the cliff.

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Re: Best way to short the equity market

Post by whodidntante » Thu Mar 22, 2018 4:31 pm

Dear OP,

The options have been presented. What did you decide to do?

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Re: Best way to short the equity market

Post by alex_686 » Thu Mar 22, 2018 4:38 pm

I was on the margin desk during the dot.com boom. I saw a fair number of people short the dot.com stocks. There is a phase I will never forget. "The market can stay irrational longer than you can stay liquid". I saw more people get crushed as the market continued to irrationally rise then I saw people make money make money when the bubble eventually popped.

If you are going to do this then buy long "deep out of the money" put options - probablly 2019 leaps.

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Re: Best way to short the equity market

Post by b0chatma » Thu Mar 22, 2018 4:43 pm

alex_686 wrote:
Thu Mar 22, 2018 4:38 pm
I was on the margin desk during the dot.com boom. I saw a fair number of people short the dot.com stocks. There is a phase I will never forget. "The market can stay irrational longer than you can stay liquid". I saw more people get crushed as the market continued to irrationally rise then I saw people make money make money when the bubble eventually popped.

If you are going to do this then buy long "deep out of the money" put options - probablly 2019 leaps.
Why deep out of the money? I would think deep in the money would be better so that your delta is more representative of the underlying. Deep out of the money would seem more appropriate for black swan hedging (i.e. insurance). Deep in the money would seem best when you need a short investment vehicle that closely tracks the underlying.

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Re: Best way to short the equity market

Post by bondsr4me » Thu Mar 22, 2018 4:48 pm

radiowave wrote:
Sat Mar 03, 2018 5:55 pm
Dumb question, what does shorting the equity market mean?
Normally, you buy low...sell high.

Shorting involves selling high first, buying low later.

Shorting the market can result in unlimited losses when you sell equities you don’t own at the time you sell them.

It can be an extremely risky proposition.

Don

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Re: Best way to short the equity market

Post by bondsr4me » Thu Mar 22, 2018 4:52 pm

alex_686 wrote:
Thu Mar 22, 2018 4:38 pm
I was on the margin desk during the dot.com boom. I saw a fair number of people short the dot.com stocks. There is a phase I will never forget. "The market can stay irrational longer than you can stay liquid". I saw more people get crushed as the market continued to irrationally rise then I saw people make money make money when the bubble eventually popped.

If you are going to do this then buy long "deep out of the money" put options - probablly 2019 leaps.
+1. At least your losses are limited to your option premium.

I would think, without checking, 2019 leaps have a pretty high premium now.

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Re: Best way to short the equity market

Post by b0chatma » Thu Mar 22, 2018 4:56 pm

bondsr4me wrote:
Thu Mar 22, 2018 4:48 pm
radiowave wrote:
Sat Mar 03, 2018 5:55 pm
Dumb question, what does shorting the equity market mean?
Normally, you buy low...sell high.

Shorting involves selling high first, buying low later.

Shorting the market can result in unlimited losses when you sell equities you don’t own at the time you sell them.

It can be an extremely risky proposition.

Don
Selling short isn't risky because of the "unlimited loss" potential. You have unlimited loss potential going long as well. The big risk in shorting the equity market is the fact that the market is above its 200 day MA 70% of the time and only below the 200 day moving average 30% of the time. Companies are constantly focused and working hard to keep that upward momentum. So shorting goes against the standard business efforts to raise stock prices and the probability is not in your favor.

But when markets are over priced and price breaks the 200 day moving average there is a solid potential for asymmetric gains if you have a tight exit strategy if price goes back above the 200 day moving average. (use a 10 month moving average or a 10 day cross of the 200 day moving average in order to prevent numerous whipsaws). You can try your luck with shorting, you can stick with buy and hold or you can sit in cash. In an overpriced market which one is the best? I'm leading toward shorting or cash.

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Re: Best way to short the equity market

Post by alex_686 » Thu Mar 22, 2018 4:56 pm

b0chatma wrote:
Thu Mar 22, 2018 4:43 pm
Why deep out of the money? I would think deep in the money would be better so that your delta is more representative of the underlying. Deep out of the money would seem more appropriate for black swan hedging (i.e. insurance). Deep in the money would seem best when you need a short investment vehicle that closely tracks the underlying.
Yes. So how do you want to short the market?

"In the money" is going to be expensive but gets you more or less the inverted performance. At the money will be the most expensive, with most of the premium going towards volatility.

However, in my opinion, betting against the market is a losing game. The above 2 strategies will just slowly grind you to death. If you are going to do this you must have conviction so you might as well go big. Or, as you say, bet on the black swan. Plus there is some evidence that the long dated deep out of the money options are miss-priced, as in under priced.

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Re: Best way to short the equity market

Post by alex_686 » Thu Mar 22, 2018 4:59 pm

b0chatma wrote:
Thu Mar 22, 2018 4:56 pm
You have unlimited loss potential going long as well.
When you go long you can only lose as much money as you put in. Your losses are capped at 100%. Like I said, I was on the margin desk. I have seen people lose more than 100% of their investment. I saw my brokerage firm liquidate a persons account and then go after people's houses, retirement plans, business, etc. to recoup their losses.

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Re: Best way to short the equity market

Post by bondsr4me » Thu Mar 22, 2018 5:01 pm

b0chatma wrote:
Thu Mar 22, 2018 4:56 pm
bondsr4me wrote:
Thu Mar 22, 2018 4:48 pm
radiowave wrote:
Sat Mar 03, 2018 5:55 pm
Dumb question, what does shorting the equity market mean?
Normally, you buy low...sell high.

Shorting involves selling high first, buying low later.

Shorting the market can result in unlimited losses when you sell equities you don’t own at the time you sell them.

It can be an extremely risky proposition.

Don
Selling short isn't risky because of the "unlimited loss" potential. You have unlimited loss potential going long as well.
You don’t have unlimited losses going long. You only lose your initial investment. The bottom is zero.

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Re: Best way to short the equity market

Post by chicagoan23 » Thu Mar 22, 2018 5:02 pm

b0chatma wrote:
Sat Mar 03, 2018 4:26 pm
I plan to short the equity market; however, I don't see a great investment vehicle to do this. I have a 401k, roth IRA, and a traditional cash account. So 2 of the 3 will not allow margin to short stocks. I looked at inverse ETFs such as "SH" but those are created specifically for daily trading and compound daily and don't do a great job tracking the underlying asset. I've also considered buying in the money leaps which could work as well but I'm going to pay a premium and still not get that great of tracking. I would like to hold the short for the full length of the downtrend which could easily be over a year.

Any suggestions?
Obviously if you are shorting the market you are speculating, not investing. Nothing wrong with that, but if you are betting that the stock market will fall, then can you explain why it isn't OK to use the inverse ETFs, especially those that use leverage? Yes, they are designed for daily trading but a downtrend in a leveraged ETF would be very profitable anyway, even with tracking errors and fees. And if you are wrong, your only exposure is the amount you paid for the ETF--unlike shorting, where you can lose more than your initial investment.

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Re: Best way to short the equity market

Post by alex_686 » Thu Mar 22, 2018 5:06 pm

chicagoan23 wrote:
Thu Mar 22, 2018 5:02 pm
... then can you explain why it isn't OK to use the inverse ETFs, especially those that use leverage? Yes, they are designed for daily trading but a downtrend in a leveraged ETF would be very profitable anyway, even with tracking errors and fees.
Because they re-balance daily you don't get the inverse return. It is path dependent. There are fact patterns where the market goes down and the leveraged inverse ETF also goes down.

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Re: Best way to short the equity market

Post by b0chatma » Thu Mar 22, 2018 5:12 pm

alex_686 wrote:
Thu Mar 22, 2018 5:06 pm
chicagoan23 wrote:
Thu Mar 22, 2018 5:02 pm
... then can you explain why it isn't OK to use the inverse ETFs, especially those that use leverage? Yes, they are designed for daily trading but a downtrend in a leveraged ETF would be very profitable anyway, even with tracking errors and fees.
Because they re-balance daily you don't get the inverse return. It is path dependent. There are fact patterns where the market goes down and the leveraged inverse ETF also goes down.
Definitely a word to the wise. Never buy a leveraged/derivatives based ETF. They are disastrous. They really should be banned to everyone other than day traders. Just look at how DIG or DUG has performed compared to the underlying.

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Re: Best way to short the equity market

Post by b0chatma » Thu Mar 22, 2018 5:17 pm

bondsr4me wrote:
Thu Mar 22, 2018 5:01 pm
b0chatma wrote:
Thu Mar 22, 2018 4:56 pm
bondsr4me wrote:
Thu Mar 22, 2018 4:48 pm
radiowave wrote:
Sat Mar 03, 2018 5:55 pm
Dumb question, what does shorting the equity market mean?
Normally, you buy low...sell high.

Shorting involves selling high first, buying low later.

Shorting the market can result in unlimited losses when you sell equities you don’t own at the time you sell them.

It can be an extremely risky proposition.

Don
Selling short isn't risky because of the "unlimited loss" potential. You have unlimited loss potential going long as well.
You don’t have unlimited losses going long. You only lose your initial investment. The bottom is zero.

Yes theoretically, but I'm talking equity markets. I've never seen an equity market rise so fast that a brokerage firm couldn't initiate a margin call on your account. Yes, using margin on futures can quickly blow up your account beyond your account balance but with shorting a stock index I doubt there is an example of the market going up fast enough to blow out your account beyond your account balance. Just trying to keep things in perspective of what is actually trying to be done here which is short the equity market.

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Re: Best way to short the equity market

Post by Grt2bOutdoors » Thu Mar 22, 2018 5:18 pm

b0chatma wrote:
Thu Mar 22, 2018 3:59 pm
A timely read for any of you who would be interested in "skipping" the next bear market.

These two write ups are quick reads and simple to implement as a retail trader. The strategy delivers equity returns with bond like risk. Good luck

White paper:
https://papers.ssrn.com/sol3/papers.cfm ... _id=962461
https://papers.ssrn.com/sol3/papers.cfm ... id=1585517
Most on the forum are investors, not traders.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Best way to short the equity market

Post by chicagoan23 » Thu Mar 22, 2018 5:22 pm

b0chatma wrote:
Thu Mar 22, 2018 5:12 pm
alex_686 wrote:
Thu Mar 22, 2018 5:06 pm
chicagoan23 wrote:
Thu Mar 22, 2018 5:02 pm
... then can you explain why it isn't OK to use the inverse ETFs, especially those that use leverage? Yes, they are designed for daily trading but a downtrend in a leveraged ETF would be very profitable anyway, even with tracking errors and fees.
Because they re-balance daily you don't get the inverse return. It is path dependent. There are fact patterns where the market goes down and the leveraged inverse ETF also goes down.
Definitely a word to the wise. Never buy a leveraged/derivatives based ETF. They are disastrous. They really should be banned to everyone other than day traders. Just look at how DIG or DUG has performed compared to the underlying.
I'm not sure I understand the logic. Are you talking long-term or short-term? Long-term I understand they do not track well, but short-term they seem to work?

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Re: Best way to short the equity market

Post by b0chatma » Thu Mar 22, 2018 5:25 pm

chicagoan23 wrote:
Thu Mar 22, 2018 5:22 pm
b0chatma wrote:
Thu Mar 22, 2018 5:12 pm
alex_686 wrote:
Thu Mar 22, 2018 5:06 pm
chicagoan23 wrote:
Thu Mar 22, 2018 5:02 pm
... then can you explain why it isn't OK to use the inverse ETFs, especially those that use leverage? Yes, they are designed for daily trading but a downtrend in a leveraged ETF would be very profitable anyway, even with tracking errors and fees.
Because they re-balance daily you don't get the inverse return. It is path dependent. There are fact patterns where the market goes down and the leveraged inverse ETF also goes down.
Definitely a word to the wise. Never buy a leveraged/derivatives based ETF. They are disastrous. They really should be banned to everyone other than day traders. Just look at how DIG or DUG has performed compared to the underlying.
I'm not sure I understand the logic. Are you talking long-term or short-term? Long-term I understand they do not track well, but short-term they seem to work?
A bear market can easily last over a year. That's too long for ETFs like this.

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Re: Best way to short the equity market

Post by Spyder59 » Thu Mar 22, 2018 5:40 pm

Without getting into the merits of shorting, I use two ETFs: HDGE and TAIL. They behave differently and I suggest you study the composition of each one and make an informed decision about their utility and suitability for you. There is a fair amount of material on the WEB, a lot of it is on SeekingAlpha and unfortunately is only available to members. In general, most people would be wise to heed the general advice on this forum and avoid shorting altogether. On the other hand, if you are willing to educate yourself and a have a well defined reason to hedge, these ETFs can have utility. Otherwise, move on.

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Re: Best way to short the equity market

Post by Toons » Thu Mar 22, 2018 5:44 pm

Funds that "Bet Against the Market" :shock:

http://news.morningstar.com/fund-catego ... CA$BM.aspx
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Best way to short the equity market

Post by alex_686 » Thu Mar 22, 2018 8:12 pm

bondsr4me wrote:
Thu Mar 22, 2018 4:52 pm
I would think, without checking, 2019 leaps have a pretty high premium now.
Define "high". I think it would be one of the most efficient. You are basically buying pure downside volility.

To extend on my prior posts, consider 2 people.

The first person has a slight opinion that the markets will have a modest fall. The second person has a strong opinion that there will be a major market fall. What should they do?

The first person probably should do nothing. If they hedge for a modest market drop they will only make a modest gain. And they are not too sure of that. The risk/reward for them is probably not enough to leave the neuronal position.

The second person on the other hand should make that bet, a use long dated deep in the money puts. If they are wrong then they just lose the premium. If they are right then they win big. The options market is pretty good at these big asymmetric bets. I think this is the camp that the OP is in.

Except that thhe OP sounds like a novice, options are complex, and shorting the market has a long history of crushing people. So there is that.

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Re: Best way to short the equity market

Post by chicagoan23 » Tue Aug 21, 2018 2:45 pm

alex_686 wrote:
Thu Mar 22, 2018 8:12 pm
bondsr4me wrote:
Thu Mar 22, 2018 4:52 pm
I would think, without checking, 2019 leaps have a pretty high premium now.
Define "high". I think it would be one of the most efficient. You are basically buying pure downside volility.

To extend on my prior posts, consider 2 people.

The first person has a slight opinion that the markets will have a modest fall. The second person has a strong opinion that there will be a major market fall. What should they do?

The first person probably should do nothing. If they hedge for a modest market drop they will only make a modest gain. And they are not too sure of that. The risk/reward for them is probably not enough to leave the neuronal position.

The second person on the other hand should make that bet, a use long dated deep in the money puts. If they are wrong then they just lose the premium. If they are right then they win big. The options market is pretty good at these big asymmetric bets. I think this is the camp that the OP is in.

Except that thhe OP sounds like a novice, options are complex, and shorting the market has a long history of crushing people. So there is that.
With a new high today for the S&P 500 I was thinking about this thread.....I don't think OP made a follow-up post but was wondering if there is any performance update?

2015
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Re: Best way to short the equity market

Post by 2015 » Tue Aug 21, 2018 3:08 pm

bottlecap wrote:
Sun Mar 04, 2018 10:13 am
I’d rather sit blindly than run around blindly.

I predict this will be a thread that will have 7 pages of posts by 2023.

JT
My new favorite post. Those who sit blindly won't run headlong into something as a result of iotrogenics.

The problem is the blind steeped in activity convince themselves they see something that is in fact not there (perceptual bias) and then use all kinds of faulty reasoning to continue convincing themselves that it exists (cognitive bias).

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Re: Best way to short the equity market

Post by H-Town » Tue Aug 21, 2018 3:37 pm

This type of shorting the market can get you poor very quickly. You know... you can also get adrenaline rush by track racing, base jumping, tactical training, etc.

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Re: Best way to short the equity market

Post by b0chatma » Tue Aug 21, 2018 3:56 pm

No update from me. The bull market continues to press on and hasn't yet triggers a sell signal using a 10 month moving average.

I will admit though that after doing a number of back tests using trend following strategies in the end I realize that trend following is a form of insurance. Like all insurance you only need it in catastrophic instances and when don't experience catastrophic events it will cost you. Meaning when you sell out due to the sell signal and buy back in you are commonly buying back in at a higher price than you sold out. Essentially you are worse off than if you were to buy and hold. This is the cost. So my conclusion is that trend following is only worth the cost when you are coming to an end of the business cycle which we are now.

In regards to shorting... You have to be excellent at finding these major turns which doesn't happen in a systematic strategy. So shorting using a systematic trend following strategy produced terrible results. I still feel that when this market breaks down it's going to break down hard. However, I'm not going to speculate and I'll keep with the more hands off approach which is to buy and hold for the majority of the business cycle and then use trend following at the tail end.

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