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David Pinsen  

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  • Dead-Cat Bounce Or Continued Bull Market? How To Invest If You're Uncertain [View article]
    Omar,

    It's only difficult if you do the calculations manually. With Portfolio Armor, you just need to enter the dollar amount you're looking to invest and the biggest drawdown you're willing to risk, and it does all of that work for you.

    One of the main reasons we use options to hedge is their nonlinearity, an example of which you can see in the movement of the SPY put option I showed in a previous article ( http://seekingalpha.co... ). On a day when SPY dropped ~4%, that put option was up ~80%. Because of that nonlinearity, you often only need to allocate a small amount of money to options to hedge a much larger underlying position or portfolio. In the example shown in that article, less than 1% of position value allocated to the SPY put would have protected an SPY position against a >20% drop. That's not the case with inverse ETFs, even 3x levered ones. You'd have to allocate so much of your portfolio to them to get the same level of protection that it would be a huge drag on your returns.
    Aug 27, 2015. 04:02 PM | 1 Like Like |Link to Comment
  • Dead-Cat Bounce Or Continued Bull Market? How To Invest If You're Uncertain [View article]
    As I said in the comments on that article, from what I'd heard, Tesla owners generally love the cars. Curious, though, that Seeking Alpha contributor Scott Tzu considers the Consumer Reports rating bearish: http://seekingalpha.co...
    Aug 27, 2015. 03:14 PM | 1 Like Like |Link to Comment
  • Long-Term Favorites In This Market [View article]
    Interesting list. Two of the names in your top 14 also appear on Portfolio Armor's ranking of top securities by net potential return (potential return over the next six months, net of hedging costs): Sketchers (#3 currently) and Google (#6).
    Aug 27, 2015. 05:13 AM | 2 Likes Like |Link to Comment
  • Lessons From Monday's Market Meltdown [View article]
    That approach requires the ability to time the market. I don't know how to do that, so I prefer hedging with options, because you only need a tiny amount of them to limit your downside risk, so there's less drag on your portfolio if a bear market doesn't materialize in the near term.
    Aug 26, 2015. 09:28 PM | Likes Like |Link to Comment
  • Lessons From Monday's Market Meltdown [View article]
    Kolorado,

    Inverse ETFs can work as a sector bet, as you are using them. I think cparmerlee's point was that it wouldn't make sense to, for example, own QQQ and PSQ.
    Aug 26, 2015. 09:25 PM | 1 Like Like |Link to Comment
  • Lessons From Monday's Market Meltdown [View article]
    Jim,

    As I'm sure you know, some would describe the stock market as a casino (though Charlie Munger prefers the race track analogy, with its pari-mutuel betting). Options can be used for speculating (or, "gambling", if you prefer), but they can also be used to hedge, or reduce risk. Hedging is how we use options in Portfolio Armor's hedged portfolio method. Hedging is the opposite of gambling.

    With the hedged portfolio method, in-the-money options won't expire unused, as we suggest exiting positions (underlying securities and their option hedges) shortly before they expire. In the best case scenario, your puts will be worth very little at that point, because your underlying securities will have appreciated so much. Our "bet" here, if you want to call it that, is on the underlying securities, not the put options. The point of the put options is to protect us if our "bet" on the underlying securities goes against us. The safety they provide is real, not illusory: if you use Portfolio Armor to hedge against a >X% drop, and your underlying securities blow up, your downside will be strictly limited to X%. No illusion there.

    As for selling puts on Tesla, sure, that would make sense if you are bullish on Tesla and don't want to hedge. But the premise of my Tesla article was that, given the headwinds, some Tesla investors might want to hedge.
    Aug 26, 2015. 09:17 PM | 1 Like Like |Link to Comment
  • Lessons From Monday's Market Meltdown [View article]
    I wasn't recommending adding inverse ETFs for hedging purposes, just noting that they went up on the day. Your comment alludes to an advantage options have over inverse ETFs for hedging: their non-linearity. To hedge a portfolio with options, you only need to allocate a small percentage of your assets to them. You can see an example of that nonlinearity with the movement of the SPY put shown above. SPY was down about 4% on Monday, but that SPY put was up nearly 80%.

    Portfolio Armor may at times include an inverse ETF in a hedged portfolio, but it won't do so for hedging purposes. It uses options for hedging. It will only include an inverse ETF in a hedged portfolio for the same reason it would include any stock or ETF: because it calculates that that inverse ETF has a high potential return over the next six months, net of its hedging costs (i.e, a high net potential return). That was the case with SCO on Friday, when it had the 5th highest net potential of all of the securities in Portfolio Armor's universe (the top four securities were stocks).
    Aug 26, 2015. 12:47 PM | 1 Like Like |Link to Comment
  • IBM's 21st Century Transition Is Failing [View article]
    Thinking back to my Twitter feed when the current IBM CEO was installed, the most important point I remember being made about her was that she was a woman. Maybe IBM would do better to aim for competence in its next CEO instead of focussing on identity politics.
    Aug 26, 2015. 04:15 AM | 2 Likes Like |Link to Comment
  • Adding Downside Protection To Tesla [View article]
    The 3 stocks in that hedged portfolio - FB, DXCM, and NFLX - aren't doing terribly today. But the good thing about hedged portfolios is when the holdings don't do well, your downside is strictly limited. http://seekingalpha.co...
    Aug 25, 2015. 01:32 PM | Likes Like |Link to Comment
  • Adding Downside Protection To Tesla [View article]
    In this article, I mentioned the hedged portfolio method. In a new article of mine just published, I show an example of how a small investor can use that method to limit his downside risk while maximizing his expected return: http://seekingalpha.co...
    Aug 25, 2015. 07:07 AM | Likes Like |Link to Comment
  • How Last Week's Hedge Softened The Blow For Tesla Longs [View instapost]
    Thanks, Kim, and congratulations on your great returns with TSLA calendars.
    Aug 25, 2015. 12:09 AM | Likes Like |Link to Comment
  • Investing Alongside 'The Apple Of Finance' While Limiting Your Risk [View article]
    Hi Daniel,

    You raised a good point about the difference between potential and expected returns here. After extensive backtesting, we've clarified our use of the terms and quantified a relationship between the two. In a nutshell, the actual returns on our top-ranked securities ended up being 0.3x the calculated potential returns. So, we now present an expected return for portfolios, which is 0.3x the aggregate potential return of the holdings, net of hedging costs.

    More details on that, and results of our backtests are here, if you'd like to take a look: http://seekingalpha.co...

    Best,

    David Pinsen
    Aug 24, 2015. 11:48 PM | Likes Like |Link to Comment
  • Adding Downside Protection To Tesla [View article]
    Here's an update on how that Tesla hedge would have softened the blow for Tesla longs today. TL;DR version: with that hedge, a Tesla long would be down 4.2% as of today's close; an unhedged Tesla long would be down 14.3% over the same time period. http://seekingalpha.co...
    Aug 24, 2015. 06:22 PM | 1 Like Like |Link to Comment
  • Adding Downside Protection To Tesla [View article]
    And the salient point is that the most you can lose on a long position is 100% of it, whereas you can lose more than that on a short position.

    As part of a market neutral strategy, shorting can reducing risk. But I stand by point that going from being long Tesla to being short it isn't a way to reduce risk. It's replacing one risk with another, potentially larger one.
    Aug 24, 2015. 02:18 AM | Likes Like |Link to Comment
  • Adding Downside Protection To Tesla [View article]
    What's interesting is that I assumed that would be the case when running the backtests on our hedged portfolio method, so I backtested them exiting losing positions well before the hedges expired, and exiting them just before the hedges expired. Holding the positions longer generated better returns over all. I think the reason for that was, although you gave up time value on underlying securities that didn't recover, by holding the positions longer, you gave the underlying securities that did recover more time to do so, and the gains from that outweighed the lost time value on the losing positions.

    Of course, if you are confident an underlying security you hold is going down the tubes with little chance of recovery, then you might be better off exiting early and letting the time value soften the blow more than the hedge would closer expiration. The nice thing about being hedged is that you have those choices to make, rather than the less palatable choices unhedged investors have when their securities have gotten hammered. 
    Aug 24, 2015. 02:10 AM | 1 Like Like |Link to Comment
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