Changing Our Understanding of Risk | Truth or Skepticism
Last time they met, Dylan had a hop in his step. Equities were in the midst of a strong rally giving passive investing some credibility, at least to the less informed. But like a brown bear under a deck, Tom sat patiently, waiting. With the market pulling back recently, this time it was Tom with a hop in his, err, step.
We are in the heart of earnings season. Companies like Apple and Netflix disappointed investors and subsequently, their stocks fell precipitously. On the other hand, companies like Facebook and Amazon have been handsomely rewarded for exceeding expectations. Dylan, still an apprentice, was looking for trading ideas in the wake of such large price gyrations.
For Tom, the answer is simple: short Amazon and Facebook, get long Apple and Netflix. True contrarians buck the trend. Sell into strength, buy into weakness. That is the tastylive way.
tastylivers know volatility overstates expected moves in underlying assets. When leadership stocks sell off hard, volatility ticks up causing premium to become rich. Tom takes advantage by selling puts to get long. He might be able to give up meat, but not rich premium.
The thought process is the same when stocks skyrocket. As assets move higher, volatility contracts. Selling premium in low volatility is less appealing. Therefore, to get short, Tom looks to strategies like buying a put spread or buying a calendar spread.
Markets have been somewhat manic this year. January and February saw a sharp selloff. March and April saw an equally sharp rally. Bonds have more or less sustained their rally throughout. From a trader’s perspective, Dylan wanted to know if Tom has ever seen a comparable market.
Tom has suggested several times he thinks the market will end the year +/- 5% from 2015’s end. While he could not recall a time markets began the year this way, the moves up and down essentially negate one another, furthering Tom’s belief where markets will end 2016.
The best opportunity in Tom’s mind right now is not necessarily in stocks. Tom believes the best opportunity is in shorting bonds. In fact, if there were one position he wishes everyone had it is short bonds. Juxtaposed against the risk in stocks, the bond bubble scares Tom more.
Dylan’s homework? Long Apple and Netflix. Short Amazon and Facebook. And really short bonds. He has two weeks to complete his assignment.
Josh Fabian has been trading futures and derivatives for more than 25 years.
For more on this topic see:
Changing Our Understanding of Risk | Truth or Skepticism - April 29, 2016
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2023 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.