Help needed: I’m Low IQ and want to short the stock market
I want to short the US stock market and so I have started researching how I would do that.
I would really appreciate if someone can help explain to me (a) why this is wrong and (b) the correct math on how much this costs and how much it would return given a range of possible crashes.
Some reasons why I want to short the market
- I believe in reflexivity and trends. Obviously we are in an insane all-asset bull market. I believe that the event that precipitates the drop may be very sudden. Something causes a huge selloff and then tons of stop losses are triggered and panic takes hold of the market. Investor bullishness is feeble when everyone knows it’s a bull market and is simply trying to not be the last person s hot potato. Everyone starts rushing out the fire exit. There’s not enough buyers. Order books thin out such that a small amount of sell volume causes a huge price decrease except there’s a tremendous amount of sell volume. Hedge funds try to unload huge positions and everything collapses.
- There are various theories for why a sudden large correction (crash) won’t occur. I don’t know about this, but I just read a book that tracked warren buffet’s career and there was ALWAYS a reason why it supposedly wouldn’t happen. Every time.
- I think humans are adverse to bets like these, which underprices them. no one wants to make money once in a decade. they want to make money daily. making money once in a decade is bad for morale.
- I assume there’s a huge lack of institutional money on this side of the bet, because you can’t sustainably run a hedge fund by losing money 9 out of 10 years. If you lose money in a single year you might receive 50% AUM in redemption requests. Everyone is chasing gains NOW and institutional money is only in these contracts to the degree needed as a HEDGE, not a bet, and actually I assume far less cash is in than this would imply tbh because fund managers are playing with OPM and many have a heads-i-win-tails-you-lose compensation structure. to post record returns and climb to the front of the pack they need to hedge less than they actually should and justify it by pretending they aren’t actually taking risk. So I believe institutional money is only taking this side of the bet to the degree that those funds are stewarded by contrarians who also have big balls and whom are allowed to place bets like these. I don’t see that being a lot. And like I said I assume hedge funds are mostly underhedged. the cost of buying this "insurance"/hedge eats directly into their returns. better to just cross your fingers and bail from the market as fast as possible if shit hits the fan
- I don’t really know what I’m talking about but I assume financial models used for investing are based on models that underestimate the likelihood of crashes. I assume some amount of traders and firms are, during normal times, using financial models which basically expect things to be normal and which assign fat tail events an unrealistically low probability. instead of attempting to use a correct model, which would be difficult to build accurately anyway because there’s not enough data on once in a decade events in order to construct them, and the crashes often have unique causes, they just use an incorrect model that’s more correct most of the time and then move into cash when the market starts collapsing.
- Timing the market is notoriously difficult. So I will place this bet with an amount of money I can afford to lose. Perhaps I will spend $10,000 per year maintaining this bet until I no longer feel it makes sense or a crash occurs. (The expected profit from this would compensate how many years of making this bet?)
How should I do it?
I don’t know. I HAVE NO IDEA WHAT I AM DOING. I did some research on April 18th and found that I can buy e-mini (S&P 500) quarterly put options with a strike price of 3000 USD and an expiry 60 days from now for $4.10. It said the premium is $205.
I chose the puts with a strike price of 3000 because that would be a roughly 30% market drop, which I believe is reasonable.
- Does this mean that 30 days ago when these were sold they cost $205 but now they’re only 4.10 because ~30 of the 90 days have already elapsed? If so, why a 98% decrease after just 1/3 the life of the contract?
- If the price of the S&P500 hits $3000, how much are these put options now worth?
- If the price of the S&P500 drops all the way to $1,000, how much are these put options now worth? $5,000 each?
- If the price of the S&P500 drops to $3,100 but no lower, then these are worth a lot, but less than the answer to (2) above, and must be sold on to someone else before expiry, right?
If the $205 figure is the cost to buy the option on day 0, then this means every 90 days I can bet the market will crash 30% for a return of 14.6X in the event that it does? And at the current price, I can bet it crashes 30% within the next 60 days for a return of 731X if that’s exactly what happens?
Please help me learn and tell me why I’m dumb.
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April 20, 2021 at 06:40AM