Stupid question: if you think it’s a good idea but don’t know when the price will go up, you just buy stock and wait. But if you think it’s a bad idea and don’t know when the price will go down, is there any long-term alternative to shorting that doesn’t require betting on the date?
The move equivalent to buying stock when you think it’s going to go up is to sell stock you own when you think it’s going to go down.
Or you can look at the series of actions, where buying when you think it’ll go up is just step 1, then step 2 is wait for it to go up, and step 3 is sell it for a profit, and step 4 is look for the next stock you think will go up (or wait and hold the cash if you don’t think any will).
In which case you can do step 3 if you own the stock, or step 4 if you don’t. Then, if it does crash (and the crash is stock prices and not the currency itself, like what happened to a degree in response to the money printed after 2020), you can buy back in at the bottom and wait for it to go up.
But if the fed pumps money into the system to prop up the stock markets, or the government bails out firms that might go under, then that money can be used to keep the stock prices high. And with the richest 1% owning such a high portion of the entire economy, if they have a lot of cash, they could also do that without any help from the feds (reserve or government).
So depending on how a crash is responded to, the best bet might be holding cash or avoiding holding cash. Or maybe investing in some good that holds value well.
However, holding stock might still be fine, assuming the equities you hold are able to survive the crash and everything that comes next. If you look at the historic crashes, the value does always return and pass the previous before crash value, at least on average. You won’t get rich playing it like that but you might not lose those unrealized losses unless you’re in a position where you have to sell.
Yes, you can with derivatives: buy out-of-money puts.
Derivatives are financial instruments that pay out based on market movements. A classic example is crops: using derivatives, farmers can, essentially, “lock in” the price they sell their goods at. This allows them more stability, since they know in advance how much they’ll be paid for their crops. (And they’ll separately buy crop Insurance to cover their risk for crops failing, most likely.)
Puts are a derivative that is a contract for the right to buy an asset at a given price (the “strike price”) on a given date. Usually, these are closed out by paying the cash value at the end, not actually buying the stocks.
Out of money means that the strike price is below the current market price. If they are still out of money at the end of the contract term, they are literally worthless. But, if the underlying asset (like NVidea stock) crashes, then you can earn the difference between the strike price and the market price.
What makes this speculation* strategy effective is that the market usually prices in a low probability of a major price decrease, so they’re (relatively) cheap. They also have limited downside risk—at worst, you lose everything you spent buying them. For deeply out-of-money puts, you can make a lot of money with a huge crash, but most of the time you “just” lose all your money.
This contrasts with short selling where you have unlimited downside risk. With short selling, you’re basically borrowing someone else’s share and immediately selling it at the current market price, then you need to buy it back from the market when you close out the position. So if you sold it for $100, and need to buy it back at $1000, you’re royally fucked. (You won’t be allowed to get that far, though; you need to keep assets in your account to cover the cost, so you’d be forced to continually “pony up” more cash as the price rises, until you can’t make a payment and you’re forced to close out the position, losing all your initial money and all the money you were forced to keep adding as it rose.)
But good luck with that strategy; I imagine NVidea puts are pretty expensive right now since a lot of people are making this exact bet. As such, people issuing/selling puts are demanding a lot of money to pay for them taking on risk.
* This is “speculation”, not “investment”. Investment requires, by definition, capital put towards productive assets—in other words, it needs to be expected to return an income stream of some kind, like interest, profits, or dividend payments. Speculation is betting on the direction of price movement on an asset—“gambling”, effectively, but with fancy investment words. Like in the farmer example above, they’re gambling that prices won’t go up, since they won’t gain any of the benefit from rising prices. That type of speculation reduces risk—unlike what you are asking about.
There are other ways that derivatives can reduce risk, but that’s not what you were asking about here.
One thing to add, prices can be manipulated in the short term to make or avoid certain options from getting into the money. They won’t do this to target specific individuals, but there’s a value called “max pain”, which is the price such that the most puts and calls expire worthless and the ones that are in the money pay out the minimal value, when all outstanding contracts for an equity are considered in aggregate, and prices trend towards those at expiry time.
If you imagine it like making a bet, nobody’s going to take a bet with you where they pay you when it pops, but there’s no time after which you pay them – because they’d never get any money out of that bet. Buying stock is different because it’s a thing you can own, but you can’t invest in the idea of something failing, because there isn’t any business which will take your money and make something more likely to fail.
You could buy every stock except AI-related stocks, which I believe is functionally equivalent to buying an index fund and shorting AI stocks based on the percentage of AI stocks in the index fund. You could also think about what businesses would do well (or less poorly) in the case of an AI-instigated crash, and then buy those.
Stock market derivatives are essentially all betting. You won’t get someone to bet with no date to resolve the bet: after all, you might just hold on to it until you kick the bucket.
That’s a good question I dont have an answer to. Maybe there are ways to short where you can just hold, but I dont know how. Maybe there’s a way to borrow lots of RAM and GPUs, sell them, then buy them back when the price drops and sell them for cheap back to whom you borrowed. But I dont know who would make that deal.
You can hold a short position by repeatedly borrowing more stock – but you run the risk of running out of money completely, because short positions have (theoretically) infinite downside risk.
Stupid question: if you think it’s a good idea but don’t know when the price will go up, you just buy stock and wait. But if you think it’s a bad idea and don’t know when the price will go down, is there any long-term alternative to shorting that doesn’t require betting on the date?
The move equivalent to buying stock when you think it’s going to go up is to sell stock you own when you think it’s going to go down.
Or you can look at the series of actions, where buying when you think it’ll go up is just step 1, then step 2 is wait for it to go up, and step 3 is sell it for a profit, and step 4 is look for the next stock you think will go up (or wait and hold the cash if you don’t think any will).
In which case you can do step 3 if you own the stock, or step 4 if you don’t. Then, if it does crash (and the crash is stock prices and not the currency itself, like what happened to a degree in response to the money printed after 2020), you can buy back in at the bottom and wait for it to go up.
But if the fed pumps money into the system to prop up the stock markets, or the government bails out firms that might go under, then that money can be used to keep the stock prices high. And with the richest 1% owning such a high portion of the entire economy, if they have a lot of cash, they could also do that without any help from the feds (reserve or government).
So depending on how a crash is responded to, the best bet might be holding cash or avoiding holding cash. Or maybe investing in some good that holds value well.
However, holding stock might still be fine, assuming the equities you hold are able to survive the crash and everything that comes next. If you look at the historic crashes, the value does always return and pass the previous before crash value, at least on average. You won’t get rich playing it like that but you might not lose those unrealized losses unless you’re in a position where you have to sell.
Yes, you can with derivatives: buy out-of-money puts.
Derivatives are financial instruments that pay out based on market movements. A classic example is crops: using derivatives, farmers can, essentially, “lock in” the price they sell their goods at. This allows them more stability, since they know in advance how much they’ll be paid for their crops. (And they’ll separately buy crop Insurance to cover their risk for crops failing, most likely.)
Puts are a derivative that is a contract for the right to buy an asset at a given price (the “strike price”) on a given date. Usually, these are closed out by paying the cash value at the end, not actually buying the stocks.
Out of money means that the strike price is below the current market price. If they are still out of money at the end of the contract term, they are literally worthless. But, if the underlying asset (like NVidea stock) crashes, then you can earn the difference between the strike price and the market price.
What makes this speculation* strategy effective is that the market usually prices in a low probability of a major price decrease, so they’re (relatively) cheap. They also have limited downside risk—at worst, you lose everything you spent buying them. For deeply out-of-money puts, you can make a lot of money with a huge crash, but most of the time you “just” lose all your money.
This contrasts with short selling where you have unlimited downside risk. With short selling, you’re basically borrowing someone else’s share and immediately selling it at the current market price, then you need to buy it back from the market when you close out the position. So if you sold it for $100, and need to buy it back at $1000, you’re royally fucked. (You won’t be allowed to get that far, though; you need to keep assets in your account to cover the cost, so you’d be forced to continually “pony up” more cash as the price rises, until you can’t make a payment and you’re forced to close out the position, losing all your initial money and all the money you were forced to keep adding as it rose.)
But good luck with that strategy; I imagine NVidea puts are pretty expensive right now since a lot of people are making this exact bet. As such, people issuing/selling puts are demanding a lot of money to pay for them taking on risk.
* This is “speculation”, not “investment”. Investment requires, by definition, capital put towards productive assets—in other words, it needs to be expected to return an income stream of some kind, like interest, profits, or dividend payments. Speculation is betting on the direction of price movement on an asset—“gambling”, effectively, but with fancy investment words. Like in the farmer example above, they’re gambling that prices won’t go up, since they won’t gain any of the benefit from rising prices. That type of speculation reduces risk—unlike what you are asking about.
There are other ways that derivatives can reduce risk, but that’s not what you were asking about here.
One thing to add, prices can be manipulated in the short term to make or avoid certain options from getting into the money. They won’t do this to target specific individuals, but there’s a value called “max pain”, which is the price such that the most puts and calls expire worthless and the ones that are in the money pay out the minimal value, when all outstanding contracts for an equity are considered in aggregate, and prices trend towards those at expiry time.
If you imagine it like making a bet, nobody’s going to take a bet with you where they pay you when it pops, but there’s no time after which you pay them – because they’d never get any money out of that bet. Buying stock is different because it’s a thing you can own, but you can’t invest in the idea of something failing, because there isn’t any business which will take your money and make something more likely to fail.
You could buy every stock except AI-related stocks, which I believe is functionally equivalent to buying an index fund and shorting AI stocks based on the percentage of AI stocks in the index fund. You could also think about what businesses would do well (or less poorly) in the case of an AI-instigated crash, and then buy those.
Stock market derivatives are essentially all betting. You won’t get someone to bet with no date to resolve the bet: after all, you might just hold on to it until you kick the bucket.
That’s a good question I dont have an answer to. Maybe there are ways to short where you can just hold, but I dont know how. Maybe there’s a way to borrow lots of RAM and GPUs, sell them, then buy them back when the price drops and sell them for cheap back to whom you borrowed. But I dont know who would make that deal.
You can hold a short position by repeatedly borrowing more stock – but you run the risk of running out of money completely, because short positions have (theoretically) infinite downside risk.