ERICOPOLY

Don't you pay capital gains when you eventually sell the depressed stock for gain? Well, take right now for example. I have BAC shares that have a big gain -- but I'm not selling them. Instead, I hedged. The cost of the puts is minor relative to the earnings power of the shares. Also, the capital gains are forgiven when the marriage community is dissolved (if either I die or my wife does). So it's sort of like a life insurance policy in a way -- the family gets relieved of a big tax liability. Call it a "death benefit".

The IWM $120 strike call is 2015. Now, if this market breaks significantly either way I should be able to roll it to 2016 somewhat inexpensively (due to skewness). Had FFH done that 4 years ago when IWM was at $65, consider how inexpensively they could have been rolling the calls along with the market up so much. It would be practically free to roll a $65 call these days.

Interesting. What changed your mind? I have a vague understanding that the astronomical increase in credit in China over the past few years (not just absolutely, but relative to their means) has been one of the horses pulling the cart (the global economy). They create all that credit (money) and import things from all over the world. And look at a chart of increasing margin borrowing in the US and stock prices. There is like no room for bad surprises. And the kind of bad surprise that can come out of China could very well be what tips Europe into deflation -- they are so close already. Perhaps even the US. Look at our profit margins... where does all that come from? It's got to be hit pretty hard by something like decreasing demand for our exports from economies in Europe and China. But anyways... I'm going to make about 75% gain over next two years if we muddle through and BAC goes to $22. I'll probably do just as well, perhaps better, if Russell 2000 goes into Great Depression 2.0 mode. So, I'll just eat popcorn and hope for the former (I don't want to live in a depressing time where we have widespread misery).

I am going to make a lot of money if the market doesn't crash and if BAC keeps heading higher. But I've written $22 strike calls. Used the proceeds to buy the IWM calls that hedge my IWM short. Then all the BAC is hedged at $15 and $17 strike. I've also written some SHLD puts. I've closed out my C position and am contemplating the same for JPM. I believe that I won't lose much if anything if the markets merely stand still (I have decay from the puts I've written, the calls I've written, the dividends I expect to receive, and then there is decay on the calls I've purchased and the puts I've purchased. But in short, I'm heavily leveraged on BAC to the upside, and heavily leveraged in Russell 2000 short for the downside. I can accept either BAC trudging on, or total market wipeout. Both are winners. I'm prepared for pretty much all comers. My position is different from FFH because I've hedged against the Russell 2000 moving against me (using call options). They've made no money in four years and I've made a killing (lucky perhaps). If the market continues to march on, or at least if BAC does, I will still keep making terrific gains. So, don't take my bearishness as a sign that I'm giving up all hope. It's just that I'm taking it very seriously now whereas before I was brushing off the naysayers.

Employees at companies are working for success. What I'm doing is protecting myself from the presently heavily leveraged greedy humans that will get margin calls when their overvalued assets plunge a wee bit.

The Russell 2000 has compounded at 7% annualized since the peak in 2007. The world isn't scared! Margin borrowing is at a peak -- seriously, it is. That isn't fear -- it's trumpets.

I know a lot of people recoil at discussing macro... Do you recoil at doing a credit check for somebody you intend to lend money to? The foreign markets are the buyers of US exports, and if they slow down their buying, it's going to hurt US equities similar to if they started making lower payments on a loan. That's what I think of it. You have all these American brands that the Chinese love to spend their new-money wealth on. If they have a major hiccup, like if their real estate has a 60% nose-dive, then they'll stop importing all these luxury items. That will ripple around and impact a lot of US business. Same with Europe etc... So I think paying attention to the credit health of the major consumers of US exports is a bit like paying attention to the FICO score of someone you are going to lend to. Anyways, I will make out like a bandit if the Russell 2000 crashes, and I will make out like a bandit if the shares of BAC go to $22. So I am open to either outcomes -- each one will grow my wealth. I am actually scared shitless for the global markets... but because we can't predict when, I'm still leaving open the upside to $22.

See, here's a chart of NYSE margin debt since 1995: http://advisorperspectives.com/dshort/updates/NYSE-Margin-Debt-and-the-SPX.php I would love to find a longer-term chart.

I agree that there are always scary headlines... etc.... However the reason why I started hedging was because of what has been fueling things. We are once again at a record level of margin debt. That is something that provides fuel for a fire. I was also impressed by the astounding amount of private debt that has been racked up in China over the past few years. Okay, one can argue that culturally they prefer real estate to other forms of savings, but they clearly love the leverage too. There is something going on there that looks like a stretched rubber band and that feeds on continued growth of credit -- prices should fall/weaken when that credit expansion slows. And then you have something similar to what the US went through -- a bunch of underwater debt that has no cash flow (they aren't renting these things out). Anyways, it's all too much for me as due to what is most probably a "Low T" diagnosis (were I to go seek one out).

Today's is even better. Chinese Bets on Rusty Mounds of Ore http://online.wsj.com/news/articles/SB10001424052702304020104579433011384858006?mod=Markets_newsreel_8 Apparently, some companies are having trouble accessing credit, so they are margining their stockpiles of iron ore. And they can't hedge it very well claims the article because the market for iron ore future are far less liquid than for copper. So of course, as iron ore has fallen another 8% this week, the margin calls are coming in.

After-tax 401k contributions went directly to my Roth IRA when I quit my job. The pre-tax contributions went directly to "Rollover IRA" -- from there, I eventually did a Roth conversion.

How are you buying depressed stocks w/o realizing profits on the IWM short? Are you assuming some unencumbered cash? I have synthetically unencumbered cash. My BAC puts are $17 strike and $15 strike. I ditched all the $12s. Plus, don't forget that when I short it I will get a big slug of cash (I'm selling some IWM that I don't own, and they pay me cash for that). I can then spend that cash after the market has dropped.

Tactical error... I need to change that trade. I bought IWM puts.... if those become hugely profitable at expiry, I'll have to take a painful tax hit. Instead, I need to rework the trade by dumping those puts, shorting IWM directly, and purchasing calls to hedge. That way, I can keep the short position open forever without a tax consequence. Let's say for example the market drops 50% and I want to dump the hedge. Well, I don't want to dump the hedge literally because I would be stuck paying the capital gain. Instead, I should just keep the IWM short position open (at a large gain) and buy an offsetting amount of depressed stocks. Then over time the gain on the IWM short will unwind and I'll have an offsetting gain on the stocks I purchased. No realized gains that way. Keep the assets for myself.

;D ;D ;D That would be epic if that actually happened. Just messing with ya, Gio! Don't forget Hendry (who also thinks bitcoins are a good idea and was bearish for most of the entire time) also turned bullish pretty recently. On another note, on my facebook page, a guy was bragging about his "50% gains in two months" and how he made 100% on facebook calls. I inquired about his longer term record...and was ignored. I find that to be a good technique for risk control. Brag about your unbelievable returns if you've got them... then you'll be so terrified of having egg on your face that it forces to you gain some prudence and walk away while you are still ahead. So that guy is doing the right thing to talk about 50% in two months -- it will be too humiliating to get wiped out after that, so he increases his chances of survival, ironically.

BTW, I was kidding about Gio and the market top signal thing. I know he is being patient.

Nah! Hey, I thought Gio recently admitted that perhaps the hedges were a mistake. That was like the ultimate market top signal.

Let me try my hand... When Yellowstone blows, it won't be a North American event! Maybe I can write letters for hedge funds after all.

Glad you're finally coming to the wet blanket party. ;) By the way, didn't you do something similar about this time last year? Of and on I get these pangs of conscience. This is just getting too much like Deja Vu all over again.

I think it's going to blow. I bought a lot of puts today.

There are also concerns that many Chinese companies are turning to a risky type of funding which involves importing copper and using it as collateral for bank loans. If the price of copper falls, borrowers will be forced to dump the metal to help cover losses. http://online.wsj.com/news/articles/SB10001424052702304020104579430171728494800?mod=WSJ_hpp_MIDDLENexttoWhatsNewsThird&mg=reno64-wsj

Okay, this is meant to be a joke, not a cheap shot... But quoting the shareholders' letter, stocks are soaring "particularly those with no earnings". I jest, I jest... these guys are awesome of course, just poking a little bit of fun.

1) You are providing a job to the person who replaces you 2) You are not being "greedy" earning more money for yourself that you don't need Look, if more people would quit when they are ahead there would be a more balanced society. There would be less unemployment, less concentration of wealth. We are part of the solution, not part of the problem :D

Hi Eric - how does this work in terms of sizing the hedge - do you look at your overall portfolio value; pick a percentage that you want to hedge - and buy enough puts where the value = the % of the portfolio that you want to hedge? Thanks Gary I'm having a freakout at the moment. There is no grand formula. Just panic decision making.

Maybe I would have an ego about it if I could actually analyze the companies myself, but I can't. I have very little confidence that I can continue these results. The fact that you say you cannot analyze companies yourself demonstrates the size of your ego. You know BAC just as well as anyone on the planet. It's the act of screening the universe for the best opportunities that you are self-admittedly not brilliant at doing. Thus you hedge against that weakness by using other fund managers as a "screen". Then your analytical abilities take over from there. So again, I do not understand why you would doubt these abilities all of a sudden after years of proving them out. It's not like you got lucky for a number of years and are "going out on top" as oddball says you are. It's like Buffett calling it quits in 1969 and never managing money again b/c he thought it got lucky for 20 years. Not only should you continue managing your own money, you should set up your affairs so that you could manage other people's money with the least effort possible. Again, it's like: - Michael Jordan walking away for minor league baseball - Michael Jordan walking away after his final championship simply b/c the Bulls' owners did not want to keep everyone on - Tiger Woods walking away from Jack's record in pursuit of becoming a Navy Seal - my pole vault friend who did not attept to vault professionally after being told by many professionals that he's the fastest guy they've ever seen on the runway etc.... etc.... Perhaps I'm "low T". I am turning 41 soon after all.

Today I bought $120 strike 2016 IWM puts. Maybe that will help me calm down.