Tail SP 500 Call Options

[-]NoahK8mo*216

I basically agree with this analysis. As someone with a bit of an options background, I'll try to flesh this out a bit:

1) The calls are cheap in implied vol terms. Depending on what you buy, you'll probably pay around a 13-15 implied vol. (Note that some brokerages will tell you it's even cheaper, but they are probably forgetting dividends).

2) The spreads in the calls are extremely wide. If you pursue this strategy, do not pay the offer. You should try to get filled somewhere around mid market (although you will have to aggress a little).

3) The calls have the potential to make large returns if the market merely reprices implied volatility. For instance, the 10k Dec 2029 call - trading around 170 right now with an IV of 14.9 - would be worth $370 if long dated upside vol went to 20 and $600 if it went to 25.

[-]Jonas V8mo152

Yeah, you will get much better fills if you walk your options limit orders (manually or automatically, see here for an example of an automatic implementation: https://www.schwab.com/content/how-to-place-walk-limit-order). Market makers will often fill your nearly-mid-market limit orders within seconds.

[-]Neel Nanda8mo140

Interesting. Does anyone know what the counterparty risk is like here? Eg, am I gambling on the ETF continuing to be provided, the option market maker not going bust, the relevant exchange continuing to exist, etc. (the first and third generally seem like reasonable bets, but in a short timelines world everything is high variance...)

[-]Frank Grimes8mo154

Listed options are secured by the Options Clearing Corporation. I don't think they've ever failed to secure an options trade, including through covid and the 2007-8 financial crisis. I don't think this is the biggest concern about the trade.

[-]CMinge8mo110

A case against this type of trade is made here https://www.lesswrong.com/posts/yFkNYyspBBqfSeBx9/against-using-stock-prices-to-forecast-ai-timelines

Relevant quote: "Fourth, and quite importantly, it is not obvious whether expectations of transformative AI would raise or lower stock prices. This is because, as described in the previous subsection, stock prices reflect the present-discounted value of future profits; and advanced AI may raise those future profits, but – as the central thesis of this piece argues – advanced AI would also raise the interest rate used to discount those profits. The net effect on stock prices is not immediately obvious."

[-]Jonas V8mo110

I own lots of SPY/SPX calls and agree with this perspective. I think QQQ calls also look pretty good (and have done great over the last year).

[-]Zach Stein-Perlman8mo70

Thanks. The tax treatment is terrible. And I would like more clarity on how transformative AI would affect S&P 500 prices (per this comment). But this seems decent (alongside AI-related calls) because 6 years is so long.

[-]somescience8mo60

I'm skeptical about this. I think a doubling of SPY requires one or a suitable combination of the following:

1. A doubling of the fraction of money that sits in the stock market relative to all money, in the sense of M2. (o1 tells me that we're at a ratio between 0.5 and 1.0, where ratios >1.0 are possible.)

2. A doubling of SP500 market cap relative to all global stocks' market cap, expressed in USD. (The data I get from Perplexity indicates that this ratio is currently at 0.47.)

3. A doubling of global M2 money supply expressed in USD.

Basically these quantities multiply to SPY by a straightforward Fermi-type estimate. Which one of these are you betting on with AI? Isn't a doubling in the first or second a bit implausible?

Maybe I'm missing something? I'm no economist, and I also haven't carefully checked the data used in the first two items.

Or perhaps your bet is on a doubling of the first? I'd be worried that a ratio of >1.0 indicates overextension of the stock market, but I'm not sure.

[-]sapphire8mo21

Your understanding of global assets seems quite wrong. These are 2024 numbers so slightly out of date. Fir example public companies total around 111 trillion now. The sp500 is around 52 trillion fwiw.

'Global real estate, encompassing residential, commercial and agricultural lands, cemented its status as the world's largest repository of wealth in 2022 when the market reached a value of $379.7 trillion.

According to a report from international real estate adviser Savills, this value is more than global equities ($98.9 trillion) and debt securities ($129.8 trillion) combined and nearly four times the global gross domestic product ($100.6 trillion)."

Total money is around the same as debt. Private companies add up to a lot but I'm not sure anyone has a good estimate.

I'm not going to get into all the implications. But your premises are not true.

[-]somescience8mo70

Thanks for the clarification. I don't see how your numbers contradict mine. But if I understand correctly: you're betting on my item 1, and you don't view it as a problem if the ratio of total market cap of stocks to money supply is >1, given that the real estate market already is like that. That seems reasonable, and I'm less skeptical now.

BTW how have you decided which fraction of your wealth to invest into this? Kelly doesn't apply because this is a single-shot scenario, so how did you go about this?

[-]Connor_Flexman8mo2-10

Kelly always applies

[-]sapphire8mo1-7

We are clearly looking at things differently. That's fine. But if two people see things differently I don't think it's wise to map what they are saying into your ontology.

[-]j_timeberlake8mo2-1

What are you specifically planning to accomplish?

In a post-ASI world, the assumption that investment capital returns are honored by society is basically gone. Like the last game in a very long series of iterated prisoner's dilemma, there's no longer a need to Cooperate. There's still time between now and then to invest, but the generic "more long-term capital = good" mindset seems insufficient without an exit strategy or final use case.

Personally, I'm trying to balance various risks regarding the choppy years right before ASI, and also maximize charitable outcomes while I still have some agency in this world.

[-]Mckiev7mo10

Can you elaborate on “balancing risks regarding the choppy years”?

[-]Frank Grimes8mo*20

If you think SPY will go up because it's gone up historically, there's more direct ways to get leverage on SPY than buying a 2030 call. If all you thought was that AI will change everything, SPY doesn't seem like the right thing to buy -- wouldn't you want something with more exposure to AI?

Edit: I also am not sure the returns of SPY in like 1974 have any predictive power on the returns of SPY next year.

[-]Xodarap8mo30

I think the claim is that things with more exposure to AI are more expensive.

[-]Zak Miller8mo20

there's more direct ways to get leverage on SPY than buying a 2030 call

I'm curious what you have in mind.

If all you thought was that AI will change everything, SPY doesn't seem like the right thing to buy -- wouldn't you want something with more exposure to AI?

Also curious what you have in mind here.

[-]Frank Grimes8mo10

To get more exposure to SPY I think you could purchase a levered ETF, purchase more SPY on margin, or at the very least buy a call that has a real amount of delta and gamma. I think that AI related stocks like NVDA probably have more exposure to AI than something that just reflects the broader market.

[-]DPiepgrass8mo11

In the short term, yes. In the medium term, the entire economy would be transformed by AGI or quasi-AGI, likely increasing broad stock indices (I also expect there will be various other effects I can't predict, maybe including factors that mute stock prices, whether dystopian disaster or non-obvious human herd behavior).

[-]PeterMcCluskey8mo20

The market seems to underestimate the extent to which Micron (MU) is an AI stock. My only options holdings for now are December 2026 MU calls.

[-]DPiepgrass8mo60

I'm curious, what makes it more of an AI stock than... whatever you're comparing it to?

[-]Rasool8mo10

What do you make of Hynix?

[-]Pablo8mo20

I agree this looks promising and is the reason I bought long-dated SPY calls a few weeks ago (already up by 30%). But I would feel more reassured if I felt I could understand why such an opportunity persists. What is the mental state of the person on the other end of this trade?

[-]CMinge8mo41

I assume the person on the other side of the trade thinks a reasonable probability distribution for the S&P 500 tail events is roughly what the distribution in fact was for S&P 500 tail events in the last century (with some minor-moderate adjustments for changes to the economy). The current market price for 12k-2028 implies a chance of profit of 1.81%, which is around how often, in Sapphire's analysis, that the S&P 500 doubled in 4 years, 4.3% (which is the scenario where the 12k-2028 calls would be in the money by expiration).

Less precisely, the other person basically expects that the options they're selling will most likely go to 0, since similar options have almost always gone to 0 historically. So writing more contracts gets them money in exchange for a slim chance they would need to sell other assets to cover a loss.

[-]DPiepgrass8mo30

I've seen a lot of finance videos talking about the stock market and macroeconomics/future trends that never once mention AI/AGI. And many who do talk about AI think it's just a bubble and/or that AI ≅ LLMs/DALL·E; prices seem high for such a person. And as Francois Chollet noted, "LLMs have sucked the oxygen out of the room" which I think could possibly slow down progress toward AGI enough that a traditional Gartner hype cycle plays out, leading to temporarily cooler investment/prices... hope so, fingers crossed.