Seeking Alpha

Daniel Moser

View as an RSS Feed
View Daniel Moser's Comments BY TICKER:
Latest  |  Highest rated
  • Building A Better Passive Mousetrap [View article]
    Interesting perspective...

    http://bit.ly/1f3GoTB
    Jan 21 01:03 PM | Likes Like |Link to Comment
  • Another View On 'Diversification Fallacies, Part 1: Asset Allocation' [View article]
    Hello Dane,

    Let's cast aside the analogy for a moment. The quote about market capitalization and correlation was literally a copy/paste from your article. Initially I was pretty certain it was an accidental typo and that you meant to put non-correlated risks but then you went on and said..."Sure, small caps tend to perform better in the long run and have more volatility and large caps tend to be more stable, but that is not evidence of correlated risk". This second sentence pretty well threw my theory about an accidental typo out the door. Having said that I definitely don't want to misrepresent your point of view, so help me understand what your intended position is with respect to diversification through asset allocation among companies of various market caps and while you are at it companies operating in various sectors?

    On the analogy, which we should drop soon as there is far more merit in other aspects of your perspective...

    Copy/Paste from your post: "Furthermore, imagine that each color of basket is considered to be an asset class. Would the farmer with 100% of his eggs in the red asset class have more risk than the farmer with 10% in each asset class? Obviously the answer is no, as the color of basket has no bearing on its structural integrity. One red basket breaking would not necessitate all other red baskets failing. This hypothetical may seem a bit silly, but the actual real life asset allocations are almost this arbitrary." END copy/paste.

    That pretty well implies that you consider asset classifications to be analogous to color? Did I get this wrong? Again, I don't want to misrepresent your POV, but your argument(s) definitely read as though you believe assets are bucketed into various groupings based on superficial characteristics (i.e. a label such as "bond" or "equity") without regard to their structural and performance characteristics. To keep the conversation informative, I just assume drop the analogy discussion...

    With respect to your comment: "If the different sizes actually had correlated risks, spreading equally between them would increase diversification." Is this supposed to be a quote from me or are you making a statement?

    This is me making a statement: There have been numerous empirical studies demonstrating that market capitalization does matter and there are many investment funds out there dedicated to exploiting performance anomalies in this area. I think the fair comparison we need to make is to stack your REIT portfolio against a portfolio built through market cap diversification and contrast the two against one another to see which has performed better (on several different characteristics) and then hazard some guesses about which strategy is more likely to perform better in the future. Same process for sector allocation. Then we will be getting somewhere...
    Jul 18 01:35 PM | Likes Like |Link to Comment
  • Another View On 'Diversification Fallacies, Part 1: Asset Allocation' [View article]
    Hey, I have to catch 'em any way I can...j/k.

    I actually think there is merit to the logic behind the fundamental business diversification, but it needs a good bit more development to evaluate. I am hopeful he comes back with some data for discussion on how these 5 REITS empirically work as a portfolio given their different business model's etc. so we can develop the discussion a bit on how to measure/execute his approach to asset allocation/diversifica...
    Jul 18 12:43 PM | Likes Like |Link to Comment
  • Could This Strategy Be The Holy Grail Of Investing? [View article]
    So it is getting pretty tricky to keep track of the comments when they land in various places...but I think I found the 100K example you were using...and unfortunately the market has already changed so it makes back tracking prices, etc. difficult from when you made the comment/example.

    So let me ask specific questions...

    1.) What is your intent relative to the underlying long 100K worth of stocks (which lets just agree is SPY for the sake of simplicity)? Is this portfolio supposed to be fully hedged, 50% hedged, 10% hedged and over what time period is this hedge supposed to be in place?

    2.) How did you decide on buying 9 PUTs and selling 3 PUTs?

    The June 2014 PUT @ 163 has a delta of -.36 at the moment. Multiply the delta by 900 (the volume of shares per contract) and you end up with a market equivalent short hedge position of 324 shares (but in options) vs. a long position of 609 shares ($100,000/$164.14). This looks awfully similar to an outright long position of...285 shares of SPY. But wait....

    You mention selling 3 weekly ITM PUT options...I don't know which strikes interest you but the way you laid out your example it appears you wish to sell a strike further ITM than the PUT you bought....

    So lets say a strike of 164.....

    The June 14 2013 PUT @ 164 is running about $1.10 per contract...and has a delta of -.45...same math as above (volume x shares, etc) you end up with a share equivalent long position of 135 shares of SPY.

    So the net position is...
    Long 609 shares SPY
    Long 135 shares equivalent (short PUTs) of SPY
    Short 324 shares equivalent (long PUTs) of SPY
    Net Position = Long 420 shares of SPY

    All of these calculations change as time passes and the market value changes. Having said that, I think you will be hard pressed to prove that your underlying long SPY position is ever more than 30-40% hedged (i.e. 420/609 = 68.97% LONG or in other words only 31% hedged)...which makes any claim that this strategy is a "win in all market conditions" a farce.

    And, I am not sure I want to spend the time digging into the misguided view of the "cost" of this position largely because such a short dated ATM option can change so dramatically on a daily basis - it makes meaningful discussion really difficult. For instance at this exact moment...you would likely argue you can earn nearly $1.10 of time value...but Monday if the market moves merely half a percent lower (to 163 from 164) your "extrinsic" value that you so willingly sold becomes almost entirely "intrinsic value" at which point your short position becomes a loser and you stand to potentially lose a heck of a lot if the market moves down any further through expiration preventing you from recouping anything to net against your long PUT position and if it falls enough...you will be a big net loser. And, we aren't talking about a 10% fall in the market...we are talking about a 2-3% fall over a week or two which is not so rare.

    Okay...sure the long PUT will move up a little bit during this same scenario but remember, oh wait this wasn't mentioned, LEAPS still exhibit time decay. In fact, the option that you are holding, which as a theta of .04, in your example is destined to, assuming nothing else changes, lose approximately 10% of its value PER MONTH (that is .04*30.5/12.35) where theta = .04; 30.5 = avg days per month; cost of the PUT = 12.35. Meaning you have to earn ~$1,100 bucks per month (.10 x 900 x 12.35) or 1.1% of the overall portfolio ($1,100/$100,000) just to pay for the "hedge".

    Let's rephrase that by saying...through a combination of appreciation in the underlying portfolio & crafty short PUT option trading on a weekly basis...you have to earn a total of 1.1% PER MONTH just to break even against the long PUT position.

    What say you?

    And if you really want to talk specifics...please clarify the overall position i.e. how far ITM/ATM/OTM the strikes are supposed to be...and how do you handle rolling the long PUT as the overall market changes?
    Jun 7 02:53 PM | Likes Like |Link to Comment
  • Could This Strategy Be The Holy Grail Of Investing? [View article]
    This is why it is hard to really assess the credibility of this as a compelling strategy...the rules haven't been specified. If you just keep moving up strike prices to earn a little extra premium you further reduce the effectiveness of the hedge as the strike positions move from 151-161; 153-161; 155-161; etc. you started out with $10 worth of protection and ended with $6. Okay, so next question...what about the long PUT position as the market moves up...do you roll that up in the strikes as well? If you do roll it up, than your math claiming to recoup the cost of the hedge is further jacked since yes you have re-sold some expensive options but you have also bought some more expensive options as well...if you don't roll them up...than you no longer even have the tinker toy amount of a hedge you started with in place.

    In my opinion you correctly point out where the returns for this strategy come from...relative differences in implied volatility/time decay. But a consistent strategy of selling short dated options against long dated options will only work when the market/implied volatility across the option curve behave a specific way...
    Jun 7 09:03 AM | 2 Likes Like |Link to Comment
  • Could This Strategy Be The Holy Grail Of Investing? [View article]
    I don't claim to be an expert on options. I simply do my best to ask questions when something comes along that appears too good to be true. I am left assuming several things with respect to your analysis largely because you didn't specify anything except a bunch of annual performance data - which makes it challenging to find this remotely credible.

    What homework would you suggest I do? Just throwing up an annual performance data table doesn't really do much to educate me on what exactly I am missing.

    You made a comment to someone else that you are buying more contracts than selling which actually means you will have to do it WAY more than 14.2 times in a row, lol. Alright, I have to play fair...I overlooked the weekly vs. monthly aspect of what you are selling. Nonetheless, I am highly skeptical (but I will try and verify) that weekly vs monthly options will change the underlying, higher level, point that hedging using options comes at an expensive cost. If your stock picking skills are good enough to surpass this cost and still outperform the SP500, more power to you. But if you think you are generating market beating returns FROM a hedging strategy, you are kidding yourself. You are taking on risk that you simply haven't figured out how to measure...and it will bite you someday.
    Jun 7 12:50 AM | 1 Like Like |Link to Comment
  • Could This Strategy Be The Holy Grail Of Investing? [View article]
    This is pretty much like pulling a paper sack over someone's head at noon while asking them if they are convinced it is suddenly night...

    The example that you posted was June 2014 @ $161 costing $13 or 8%. This particular PUT currently has a delta of -0.36 which means, for the non-option people, for a $1 change in the value of the SPY, the value of this PUT will change in the opposite direction by approximately 36 cents. In other words the 8% number that was quoted as the "cost of fully hedging" is grossly incorrect.

    I have to assume by suggesting that the cost of this hedge is 8% via simple division, that the underlying portfolio of long positions used for the core portfolio is worth approximately the same as 1 share of the S&P 500. If this is true...then in order to be "fully hedged" you must buy 2.77 (that is 1/0.36) of these PUT options which actually translates into something closer to a cost of hedging closer to 22.4% (that is 2.77 x $13/161 = 0.2237).

    If it is not true, then the only other option to be "fully hedged" is that the underlying core portfolio is equal to 36 shares of the SPY which would make the simple math = (13/(161 x .36)) which is also equal to 22.4%. The point being that your cost of hedging is grossly understated at 8% - if the intention was to be fully hedged against the broad market swings.

    "The full hedge is achieved by buying a number of SPDR S&P 500 (SPY) LEAPS put options that will fully protect the portfolio on an annual basis. By fully protect, I mean that if S&P falls by 10%, those puts will increase in value by 10% to fully cover the loss."

    "To earn back the cost of the hedge, each week we will sell short weekly puts against our long puts. Over a full calendar year, the hedge should pay for itself."

    Let's call this what it is...buying PUT spreads with different expirations/strike prices against a portfolio of single stock selections...and your math doesn't work.

    For instance...the current price for June 2014 PUT @ 161 = 12.
    The current price for the July 2013 PUT @ 151 is 0.84. This means you would have to sell the Jul13, Aug13, (prompt month equivalent) PUT each month 14.2 times in a row in order to pay for the cost of the June 2014 PUT - which is going to be quite a task considering June 2014 is 12 months away.

    The two additional problems this whole scheme has is that once you buy the put spread using June 2014 @ 161 and July 2013 @ 151, your net delta is -.23 which means...should the value of SPY change by $1 this put spread will change in an opposite direction by about 23 cents. In what world would this be referred to as fully hedged in all market conditions? Secondly, if SPY declines below 151...your underlying long position is no longer hedged AT ALL due to the fact you sold the 151 PUT. This is not fully hedged...this is hedged against a 6% market swing.

    At the end of the day this analysis didn't even stack up like a house of cards let alone fall like one. And unless it was totally misrepresented, this Anchor Strategy mentioned above doesn't sound like much more than a facade. Even if it is successful in terms of good performance, it is purely a function of allegedly superior stock selection - which is ultimately the ONLY possible way this strategy could remotely work at which point one might as well ask why not just pick stocks and short SPY on an equal value basis. If these Anchor Strategy folks - who I must admit I know nothing about outside of this SA post - are promoting themselves as running a fully hedged portfolio there are being misleading at best...but draw your own conclusions.
    Jun 6 06:38 PM | 8 Likes Like |Link to Comment
  • Will The Real 60/40 Please Stand Up? [View article]
    I will do just that if you promise to read it!
    Dec 30 12:39 PM | Likes Like |Link to Comment
  • A Homemade 130/30 Investment Strategy: A Longer-Term Perspective [View article]
    Thanks for reading!

    Brian: the current beta on TLT is much closer to -.78 as you suggest - which is what I show in my last article about 130/30 (linked at the top of this article). The only reason it is not nearly as negative in this analysis is that this analysis covers a much larger time frame.

    This article, vs. the prior article, doesn't provide quite as much clarity about my objective - which was to provide an alternative strategy to achieve the desired result of constructing a 130/30 portfolio without actually short selling any securities.

    As I think about it, unless you are exceptionally talented at stock picking, the purpose of short selling in a 130/30 portfolio is to constrain net market exposure to roughly 100% while attempting to generate some excess return via security selection. The purpose of holding TLT, LQD, and GLD in this context, is that they exhibit low and even negative Betas which effectively reduces the portfolios net market exposure (measured by Beta) to 100% while offering the potential to earn excess returns on security selection via duration, interest rate, and inflation risk exposures. I was not really thinking about them as a means to lever up the portfolio to 130% - after all the purpose of 130/30 is to maintain net market exposure of 100%.

    Your market view on TLT is definitely worth considering. Although, I think it is challenging to make a case that interest rates can rise dramatically without a material improvement in domestic/global economic conditions - which, theoretically, should result in higher stock prices despite increased inflation.

    GLD Investor: the weight adjustment process was annual after the first 14 months. Since the data was available starting in November, I waited until the end of the next calendar year to conduct the first adjustment - after which it was an annual event at the end of each calendar year.

    The process was to tweak the holding weights of QQQ & TLT (and to a lesser extent GLD & LQD) such that over the previous 12 months, using the adjusted holding weights, the portfolio would have exhibited a beta of 1.0 plus or minus roughly 5%. The adjusted holding weights were used over the next 12 month time period and this was repeated 8 times. Realistically my adjustment process was a fairly naive methodology. In real life you will want to incorporate market views on each security whereas I very blindly focused on retroactively hitting the beta number and carrying it forward to simply see the results.

    Hopefully, this answers your question sufficiently, if not hit me up again and I will try to clarify further.
    Dec 30 12:31 PM | Likes Like |Link to Comment
  • A Homemade 130/30 Investment Strategy: A Longer-Term Perspective [View article]
    My apologies if it appears I am implying that this strategy will outperform the S&P 500 over the next 40 years. That is not at all what I meant to do. My intent was to numerically re-iterate the importance of compounding and how a seemingly small positive differential can result in a dramatically better outcome (provided it is sustainable over a specific period) - not to suggest that THIS strategy WILL perform that well over the next 40 years.
    Dec 29 06:36 PM | Likes Like |Link to Comment
  • Have You Ever Considered 130/30? [View article]
    I surely can - as long as the ETFs go far enough back.
    Dec 28 09:43 AM | Likes Like |Link to Comment
  • Asset Inflation: Correlations Are All Positive [View article]
    Mmm...Perhaps you are measuring correlation in a unique way...but when I calculate it, the correlation I am coming up with is -.64 on TLT & SPY using daily returns from June 2012 through December 10 for my data set. Additionally, using a 30 day rolling correlation of TLT & SPY from June 2011 through December 12, the maximum 30 day correlation per my calculation was -.13 (which is still negatively correlated).

    What am I missing?
    Dec 11 10:25 PM | Likes Like |Link to Comment
  • Is Low Vol A Beta Phenomenon? [View article]
    "I think it's indisputable that low beta underperforms high beta, but I guess that's a fun fact of contention."

    Was that a typo? Did you mean to put it is indisputable that low beta OUTperforms high beta?
    Nov 19 12:48 PM | 1 Like Like |Link to Comment
  • Volatility Is A Risk Worth Shorting [View article]
    An excellent build/extension of the discussion. This provides a nice teaser on Risk Parity - which, based on several of the comments that were posted on my article, as well as Roger Nusbaum's article, remains a methodology that appears to be somewhat widely misunderstood and confusing. Good job - we have to keep it going!
    Sep 19 03:14 PM | Likes Like |Link to Comment
  • Is Everything We Know About Stock/Bond Allocations Wrong? [View article]
    Just out of curiosity, what is your plan to lever up "cash" two times?
    Sep 13 03:28 PM | Likes Like |Link to Comment
COMMENTS STATS
125 Comments
155 Likes