Anybody Buying Yet? Where’s the Bottom?

[SAJ-99]

Yes that's true about some companies popping on AI news. Kind of like anything blockchain related a few years ago. Dangerous game to play there.

A lot of semi companies have made a ton of money for people though and I think will continue to do so going ahead. Maybe not in the next 3-6 months after this recent run but it's hard to be negative on them this decade.

The concern isn't about the businesses, it's about future expectation and the price you have to pay for the stock. The chart looks the same as blockchain but at least there is are legit business behind this. Narrative follows price, which is why we all feel stupid after the fact for not seeing a rise or fall. A lot of money has been made and a lot of money will be lost...at some point in the future.

 

[Cornbread]

Let me just say, as a retired fully discretionary total return manager for a major money manager, active managers can beat the indices. BECAUSE they take extra risk!! How else could they beat the passive strategy. You just don't want to be loading the boat mindlessly in active or passive strategies over the cycle. You want to be in passive indices at market tops (in essence risk reduction while still staying fully invested) and at market bottoms, you want to be loading up on active managers. A very effective strategy is to actively change your mix. We ALWAYS tried to go with the high percentage bet, the no-brainer. sector bets too are a high percentage bet. You don't have to bet the farm picking one friggen name. Food for thought. Even the best can be wrong. The guy that wins once thinks he's a friggen genius. I say, do it over a 5 year or 10 year period and we'll see what kind of genius you are.

 

[Flatrock]

Word of advice, options strategies can be very costly, and I would term them risky. You need to be very quantitative , and most definitely have use of an options model, and make sure it is the "right" model. Time decay can kill ya. Ive never used options because of the time decay. Time decay is directly affected by implied volatility; the cost of insurance. I ran a major hedge desk at two large financial institutions. I don't like losing money, and that's where time decay can kill ya. The only way I'd even dance with options is to buy Way out of the money options. You have to be a very sophisticated investor/financial institution to sell options. And way out of the money options can kill ya because of the lack of liquidity. Just my own personal experience. If you think I'm FOS, then you haven't thought about using options all the way through.

If you use them right though, they can also be used to reduce risk. Sell some covered calls. Let time decay work in your favor.

I think most people try and hit grand slams with options and mostly strikeout. Depending on how you use them, options can be incredibly risky or incredibly boring.

 

[Flatrock]

Let me just say, as a retired fully discretionary total return manager for a major money manager, active managers can beat the indices. BECAUSE they take extra risk!! How else could they beat the massive strategy. You just don't want to be loading the boat mindlessly in active or passive strategies over the cycle. You want to be in passive indices at market tops (in essence risk reduction while still staying fully invested) and at market bottoms, you want to be loading up on active managers. A very effective strategy is to actively change your mix. We ALWAYS tried to go with the high percentage bet, the no-brainer. sector bets too are a high percentage bet. You don't have to bet the farm picking one friggen name. Food for thought. Even the best can be wrong. The guy that wins once thinks he's a friggen genius. I say, do it over a 5 year or 10 year period and we'll see what kind of genius you are.

It's much more the exception that active managers can beat the market on a 3, 5 or 10 year basis.

This is pretty sad. According to this, active large cap managers had underperformed the S&P 12 years in a row through 2022.

https://www.cnbc.com/2022/03/27/new-report-finds-almost-80percent-of-active-fund-managers-are-falling-behind.html

Warren Buffet's bet with hedge funds back in 2007 or so wasn't any better for the hedge fund crowd.

Billionaire Warren Buffett won $2.2 million on a bet and gave it to this charity

Warren Buffett won $2.2 million thanks to a bet he placed that, over time, the S&P 500 stock index would outperform hedge funds.

www.cnbc.com

Not that they're all bad. It's just F'n hard for managers to beat the market after fees.

 

[VikingsGuy]

It's much more the exception that active managers can beat the market on a 3, 5 or 10 year basis.

This is pretty sad. According to this, active large cap managers had underperformed the S&P 12 years in a row through 2022.

https://www.cnbc.com/2022/03/27/new-report-finds-almost-80percent-of-active-fund-managers-are-falling-behind.html

Warren Buffet's bet with hedge funds back in 2007 or so wasn't any better for the hedge fund crowd.

Billionaire Warren Buffett won $2.2 million on a bet and gave it to this charity

Warren Buffett won $2.2 million thanks to a bet he placed that, over time, the S&P 500 stock index would outperform hedge funds.

www.cnbc.com

Not that they're all bad. It's just F'n hard for managers to beat the market after fees.

And as had been said before . . . for the lottery winner it was a hell of a $2 investment . . .

Math works. Markets works. Marketing only workers for the marketer.

 

[ignorethefringes]

It's much more the exception that active managers can beat the market on a 3, 5 or 10 year basis.

This is pretty sad. According to this, active large cap managers had underperformed the S&P 12 years in a row through 2022.

https://www.cnbc.com/2022/03/27/new-report-finds-almost-80percent-of-active-fund-managers-are-falling-behind.html

Warren Buffet's bet with hedge funds back in 2007 or so wasn't any better for the hedge fund crowd.

Billionaire Warren Buffett won $2.2 million on a bet and gave it to this charity

Warren Buffett won $2.2 million thanks to a bet he placed that, over time, the S&P 500 stock index would outperform hedge funds.

www.cnbc.com

Not that they're all bad. It's just F'n hard for managers to beat the market after fees.

“For all intents and purposes, the game is over. I lost,” Seides wrote in the Bloomberg post. Seides gives a multitude of reasons for why he lost, including that “passive investing is all the rage today and the S&P 500 is the most popular index.”

This would make me think the active managers would be using the S&P 500 to their favor. But apparently not.

 

[SAJ-99]

This would make me think the active managers would be using the S&P 500 to their favor. But apparently not.

Like how?

If you use them right though, they can also be used to reduce risk. Sell some covered calls. Let time decay work in your favor.

I think most people try and hit grand slams with options and mostly strikeout. Depending on how you use them, options can be incredibly risky or incredibly boring.

Agreed, but I warn vol is oversupplied in this market (ie, everyone is selling options). You can sell a 500 strike Jan 2025 SPY call and earn 4%? Not very attractive in my opinion. Looks a lot like it did before Volmageddon in 2018. It can stay like this for a while, but as soon as some unseen "surprise" hits, it could unravel quickly. This time I'm not sure if it will be a fund or two that blows up or if every FA is selling options across client portfolios so the pain gets spread widely.

 

[Benfromalbuquerque]

Mostly the companies that buy them. It trickles down from there.

(Edit: hit the button too fast) Companies right now jump by just mentioning AI and all the wonderful things it's going to do for them. It kind of reminds me of a hunting product - I got this new call, or new gun, or new decoy. The vision for what it is going to do is rarely matched by real life.

Great analogy! I’ve never owned a robo duck. The jerk line concept from like 1697 still works today.

 

[Cornbread]

It's much more the exception that active managers can beat the market on a 3, 5 or 10 year basis.

This is pretty sad. According to this, active large cap managers had underperformed the S&P 12 years in a row through 2022.

https://www.cnbc.com/2022/03/27/new-report-finds-almost-80percent-of-active-fund-managers-are-falling-behind.html

Warren Buffet's bet with hedge funds back in 2007 or so wasn't any better for the hedge fund crowd.

Billionaire Warren Buffett won $2.2 million on a bet and gave it to this charity

Warren Buffett won $2.2 million thanks to a bet he placed that, over time, the S&P 500 stock index would outperform hedge funds.

www.cnbc.com

Not that they're all bad. It's just F'n hard for managers to beat the market after fees.

I think you also have to look at the volatility numbers too (volatility of returns), to make a fair assessment. I never see those numbers quoted. Just sayin'. Remember, Buffett runs a shop with all active managers, right? It's really hard for me to just look at averages. Averages mask a lot of the data's characteristics. I pretty much ignore these simplistic analyses.

 

[Benfromalbuquerque]

So what strike price and expiration should we be buying?

I’m glad you asked! I’m not a financial advisor and everything I’m about to write should be taken as horseshit flung by a madman.
But yes, let’s consider TSLA. TSLA investors ain’t poor so we’re going to be looking at an $8k put. The 6mo, 3mo, 1mo RSI is steady <40 or “sell” point. It was $152 a year ago at the end of April and the upcoming ER will be announced 4/17. I’m thinking the ER will flop and some longs could dump prior to that with alright gains, say at $200/sh? Given the past two quarters performance I just don’t see $275/sh come mid-May. Especially after ER in April.
The 5/17/24 $275 put looks pristine today. Delta is -.999 and if it falls like a perfectly felled tree sold to a sucker then it’ll be $19k earned.

 

[ignorethefringes]

Like how?

I guess I mean betting on positive movement and investing in funds that will follow it to balance some of their more risky bets.

 

[NDGuy]

 

[Flatrock]

I think you also have to look at the volatility numbers too (volatility of returns), to make a fair assessment. I never see those numbers quoted. Just sayin'. Remember, Buffett runs a shop with all active managers, right? It's really hard for me to just look at averages. Averages mask a lot of the data's characteristics. I pretty much ignore these simplistic analyses.

I say that's a pretty slimy answer. If a mutual fund manager said that, all I'd hear is a lot of jargon for "I didn't beat my benchmark" and them trying to justify it.

 

[Flatrock]

But yes, let’s consider TSLA. TSLA investors ain’t poor so we’re going to be looking at an $8k put.
The 5/17/24 $275 put looks pristine today. Delta is -.999 and if it falls like a perfectly felled tree sold to a sucker then it’ll be $19k earned.

It's getting late for me and either I'm confused or missing something or you're off on something. I see the May $275 put you're talking about for about $80ish(paying 8k). But to make 19k, Tesla would have to go to $0. I can't imagine you're saying it'll go to $0.

Also, you originally were referencing AI stocks with RSI of 90, I assumed you'd come back with a trade on one of those. What's your AI trade betting on a big drop?

 

[Benfromalbuquerque]

It's getting late for me and either I'm confused or missing something or you're off on something. I see the May $275 put you're talking about for about $80ish(paying 8k). But to make 19k, Tesla would have to go to $0. I can't imagine you're saying it'll go to $0.

Also, you originally were referencing AI stocks with RSI of 90, I assumed you'd come back with a trade on one of those. What's your AI trade betting on a big drop?

$19k would be the difference between the cost of purchasing the put and the balance after exercise. May or may not benefit the hypothetical TSLA shareholder if they had at least 100 shares to cover.

That 90% mention is justified by the fact that no business maintains at that level of winning for long. I reviewed yesterday’s charts and SPIR stands out as a for example. Over the past 6mo, SPIR shows 76% RSI and goes to 83% past 5 days. Options are only offered into December ‘24 and aren’t far from the money. There is an 8/16 put at $15 and that could be worth considering.

This is all horseshit though. When I optioned it was gambling. Closing options at 25% is wise and I struck out several times learning that.

 

[SAJ-99]

I guess I mean betting on positive movement and investing in funds that will follow it to balance some of their more risky bets.

Plenty of funds are momentum based (managed futures) trading, do statistical arbitrage of the names, and plenty try to guess which ones will go in and out of index. Even those are hard games to play. Kind of depends on the market environment. When market goes up every day and every week, doing anything is probably net negative for anyone except managed futures players.

 

[SAJ-99]

Also, you originally were referencing AI stocks with RSI of 90, I assumed you'd come back with a trade on one of those. What's your AI trade betting on a big drop?

I have found RSI less useful on single stocks, particularly those with a market story built around them (AMZN, TSLA, Etc). The RSI on those can stay high for a while. S&P overbought on daily and weekly basis now, which is a very strong indicator of needing a correction. Just keep in mind it doesn’t take a big sell off to bring RSI down. Just a few % or one bad week and that is it. Next week is the window for this due to option expiration. Lots of data as well. Just warn it hard to fight this trend though.

 

[Flatrock]

$19k would be the difference between the cost of purchasing the put and the balance after exercise. May or may not benefit the hypothetical TSLA shareholder if they had at least 100 shares to cover.

Yes you would pocket 19k but you'd also then be short 100 shares of Tesla. Or yes, you'd need to be long 100 shares from the start. If Tesla closes around $190 at expiration, then you'd basically break even. That is a one hell of a far cry from "19k earned" and awfully damn misleading in my opinion. You'll lose money if Tesla goes up at all.

 

[Benfromalbuquerque]

Yes you would pocket 19k but you'd also then be short 100 shares of Tesla. Or yes, you'd need to be long 100 shares from the start. If Tesla closes around $190 at expiration, then you'd basically break even. That is a one hell of a far cry from "19k earned" and awfully damn misleading in my opinion. You'll lose money if Tesla goes up at all.

Well yeah, and I don’t even get compensation for giving out this advice. We’ll just wait until mid-May and revisit to see how far I missed the mark.

 

[SAJ-99]

Yes you would pocket 19k but you'd also then be short 100 shares of Tesla. Or yes, you'd need to be long 100 shares from the start. If Tesla closes around $190 at expiration, then you'd basically break even. That is a one hell of a far cry from "19k earned" and awfully damn misleading in my opinion. You'll lose money if Tesla goes up at all.

I don't think he ever picked a target price so I am not sure where Ben got the $19k, but most of your assessment is correct. Your math was correct in that it would have to go to almost zero to clear 19k. I took it as your profit would be $19-8. Again, I think there might be better ways to structure the bet, but to each their own. Like he said, his advice is for entertainment purposes only.

Like I said, long a deep in the money put is a synthetic short position (It's a loss limiting position. Melvin Capital would have been better to do this in GME than being pure short.) If the stock goes up $1, you lose $1. If it closed at the same price, you break even. However, to clarify, you wouldn't end up short the stock at expiration (in the case where you didn't own the stock to put to the counterparty). OCC rules says it would be cash settled, I'm sure with a big haircut on the bid/ask and a nasty letter from your broker telling your to stop being a newb and manage the position before expiration.