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Betting on market direction


UNF2007
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http://www.wsj.com/articles/pensions-play-with-puts-for-protection-1471777202

 

Read this article in the Journal yesterday. In brief it seems that some pension funds have been writing large volumes of index put's as a means to increase yield.  They go so far as to say 2008 taught them they didn't understand the risk they were taking and they are now de-risking their portfolios by doing this (Hawaii put 1.6B out of a 15B fund towards this). My gut reactions to this were 1. it seems like they are achieving the opposite of what they want 2. this is being done after a long running bull market 3. how do they have any idea what is going to happen with market levels in general.  It seems like a terrible risk to take with OPM. My other thought was who are the counter-parties to this? , it doesn't talk about it in the article and I wonder if these funds have thought about who is taking the other side of this trade. Thoughts?

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http://www.wsj.com/articles/pensions-play-with-puts-for-protection-1471777202

 

Read this article in the Journal yesterday. In brief it seems that some pension funds have been writing large volumes of index put's as a means to increase yield.  They go so far as to say 2008 taught them they didn't understand the risk they were taking and they are now de-risking their portfolios by doing this (Hawaii put 1.6B out of a 15B fund towards this). My gut reactions to this were 1. it seems like they are achieving the opposite of what they want 2. this is being done after a long running bull market 3. how do they have any idea what is going to happen with market levels in general.  It seems like a terrible risk to take with OPM. My other thought was who are the counter-parties to this? , it doesn't talk about it in the article and I wonder if these funds have thought about who is taking the other side of this trade. Thoughts?

 

Not to mention that VIX is basically at all-time lows so they're not even being compensated in terms of the volatility premium that is often associated with selling options.

 

Somewhere, there is someone savvy making a lot of money from convincing people to do this while allowing the counterparties to go long vol in size with the VIX at 12...Seems like these sheep are about to get fleeced.

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Man. I think it's crazy not to be hedged in some capacity with vol this cheap...I know I certainly bought vol recently with the VIX around 12. I would have to imagine most decent funds out there are counterparties to the pensions selling puts. It's become a very cheap way to protect a portfolio.

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