Comment by confluence | Hacker News Reader

Comment by confluence | Hacker News Reader

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I have covered and perfectly hedged costless collars (via options - +/- 10-20% depending on IV) on all my equity positions to protect myself against catastrophic risks (aka black swans) at little to no cost to myself.

Here are some examples of risks I have considered (many more but cbf): economic failure (GFC)/terrorist attacks on TSLA (9/11)/unexpected death of main principals (Elon Musk et al.)/catastrophic accounting fraud (Enron/MCI Worldcom)/financial failure (Solyndra)/bankruptcy (A123)/production fraud (Fisker/BYD).

I've run many possible outcomes both in my mind and in computer simulations of TSLA's future finances (programming rocks). I've completed DCF, Monte Carlo and worst-case scenarios (by far the most important) on TSLA's future finances - which although shaky under certain conditions - do not particularly worry me, since I'm hedged, moderately risk taking and a value investor who doesn't really give a shit what the market thinks. I've got a range of prices based on market outcomes and future EV demand telling me whether to buy or sell.

I don't use leverage, margin, or derivatives that aren't fully covered and hedged by my own cold hard cash no matter what the environmental situation - let's me sleep like a baby. I hate uncapped risk - hate, hate, hate it!

I'm impervious to volatility, time decay and catastrophic risk.

My worst case VAR is 20% on the TSLA position - aka loss of 20%. I have no problems with that - I'm actually used to mark-to-market drawdowns of 50-60% - so 20% is peanuts (my current CAGR for the last 4 years has been 35% - mostly because I'm the guy that buys in a crisis with a margin of safety significantly below fair value).

My nightmare scenario is actually TSLA gapping up 20%+ without me being there to lock in another costless spread.

I'm not impervious to nuclear war - but you can't hedge that shit.

I know risk, tech, finance and economics inside and out.

Concentration is for people like me who know what they are doing. For everyone else - there's Mastercard.. I mean index funds :D

That sounds amazing. Could you explain how you set up your hedge, and why it doesn't cost you anything? I'm just starting to learn about option strategies.

Basic strategy (there are others): I own stocks in 100 chunk blocks. I then buy the exact same amount of -15-20% puts to cover my downside risk and simultaneously sell the same amount of ~+10-20% calls and use their premium to make the insurance free.

My portfolio value, if hedged perfectly and fully backed with cash is now locked to +/- ~20% (depending on IV) at little to no cost.

More here: http://www.investopedia.com/articles/optioninvestor/09/asset... || http://www.theoptionsguide.com/the-collar-strategy.aspx || http://www.theoptionsguide.com/costless-collar.aspx || http://www.advisorperspectives.com/newsletters10/Risk_Manage...

Mark Cuban used this to stay a billionaire through the dot-com crash: https://www.quora.com/How-did-Mark-Cuban-survive-the-dot-com...

But from you other posts it sounds like your expecting greater than 20% growth.

I'd just worry 20% growth could happen fairly quickly.

That's what we in finance call a good problem to have.

TSLA Puts seem to be priced with higher IV than Calls at the same distance for both near and far expiries (Calls at 120% vs. Puts at 80% of spot). I see Puts at strike $27 priced at 200% to 166% of the Calls at strike $41.

Options chains from Google Finance : http://www.google.com/finance/option_chain?q=NASDAQ:TSLA&...

So I'm assuming that the TSLA collar (unlike your other equity collars) is not costless. Or is it? Am I missing something?

Thanks for sharing your thoughts, BTW. I'm just loving going through your comments on other HN articles!

Yeh that's why I said ~15-20% - it varies with IV, I just take a different spread than exactly +/- 20%. Fundamentally I don't want to be exposed to black swan downside, and black swan upside is statistically rare - so I don't mind losing that (things don't move up 30-40% in a month too often - manias/booms are slow - but they have moved down 30-40% crashes/panics -> bull markets are slow, bear markets are fast - and that is the asymmetry I'm exploiting to cap my risk without negatively effecting my return - selling covered calls is effectively free money most of the time, and buying puts covers my ass from Enron like events and the asymmetrical movement between booms/busts/disclosure negative information like bankruptcy).

Thanks! Yes, (in my 4 years of trading experience,) I've only seen pharma stocks move up 30-40% in a month (or day!).

This is incredibly fascinating to read. Thanks for the links and insight.

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