gilch

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Donald Hobson's Shortform

In what sense is a disconnected number line "after" the one with the zero on it?

Luna First, But Not To Live There

Very much disagree on space colonies as hedge against human extinction. I could write a more detailed critique, but the bottom line is there is no x-risk severe enough to wipe out all (not merely 99.999%) humans on Earth but at the same time not severe enough to also wipe out all moon/Mars colonies.

I think this is a good point. Civilization may eventually recover from some catastrophic risks (e.g. nuclear war). And some risks are so severe that even Mars would not be safe (e.g. UFAI).

But are there no risks that could wipe out humanity on Earth that wouldn't also kill a Mars colony? A comet impacting the Earth might be at the right scale for that. Or maybe a runaway greenhouse effect triggered by our carbon emissions.

And what do you think about using space colonies as a hedge against the collapse of civilization (rather than extinction)?

The Box Spread Trick: Get rich slightly faster

I think the specific choice of SPX (the S&P 500) here doesn't matter too much, but presumably it'll be good because it's something that gets traded on a lot.

The liquidity isn't the only reason. SPX has European-style options. If you tried this on SPY instead, you'd be exposed to early-assignment risk. SPX is not the only index with European options, but it is the most liquid.

I'm unlikely to make use of this myself, not living in the US and not having that kind of money to invest.

You can adjust the width of the boxes to borrow a smaller amount. And the XSP mini options are one-tenth the size of the SPX options. They're not as liquid though. Some brokers take international customers.

How to Lose a Fair Game

Sure, the macroeconomic regime was different then; but in a world of negative interest rates, are you sure it won't change again?

Nope. We are not trying to avoid all risk. We're trying to get exposed to risk so we can get paid for it. The right side is uncomfortable. Taking on the risk of bonds crashing, in the appropriate amount, so we can get paid for it, is exactly the point of adding leveraged bonds to a risk premium portfolio. If it weren't risky, there wouldn't be a risk premium for holding it. People on the margins have been forecasting the end of the bond bull market for years. If you had listened to them then, you'd have given up the returns up till now.

If you play the game long enough, risks will eventually bite you. You will have drawdowns. Don't Bet the Farm. But the market pays you extra for it. You'll still eventually come out ahead if you size your exposure appropriately.

What posts on finance would your find helpful or interesting?

Some brokers are available internationally. I have heard of people using Interactive Brokers outside the US. CFDs are illegal in the US, but an important investment class elsewhere.

I've been using Alpha Vantage and Yahoo finance for historical data. I have heard Stooq is good for UK market data.

I've started using Oanda and Zorro on an EC2 VM to autotrade Forex. Zorro is also supposed to work with Interactive Brokers (among others). You can try Zorro for free if your account size is small enough.

I have heard there are other options. Lots of brokers have an API. It's probably not worth your time to write your own backtester/robotrader when you can use one off-the-shelf. You still have to code your strategy though.

What posts on finance would your find helpful or interesting?

[I'm not your financial advisor. I don't know your financial situation, and this is not financial advice. Leverage is a double-edged sword. Don't Bet the Farm.]

Depends on what you need it for. 3x ETFs are probably plenty for a basic risk premium portfolio. LEAPS might have more variety, but you have to buy 100 share increments (which makes it harder to balance in a small account), and you have to deal with vega risk and occasional rolling hassle and costs.

Portfolio margin is probably the best way overall. But I haven't seen it available for less than a $100,000 account. You can get almost 2x on an ordinary Reg-T margin account though. Brokers may charge outrageous amounts of interest for margin loans. You can sort of work around this by financing with box spreads.

Outside the US, you can probably get 5x on CFDs. I can't trade them, so I haven't looked into them too much.

Leverage up to 20x is easy to get for Forex (and maybe 50x for the major pairs), because Forex volatility is so low, you need a lot of leverage to bother with it. But the market is mature and efficient enough that I don't recommend trading it without some automation. Grinding out an edge that small is really tedious if you have to do it manually.

What posts on finance would your find helpful or interesting?

Leverage is the ratio of the amount of the investment you control to the amount of money you need to control it. Buying the investment outright is 1x leverage.

Wise use of leverage is probably required for a good return. I talked about this a bit in How to Lose a Fair Game.

Leveraging up means you are increasing the ratio, which usually means you are borrowing money to buy investments.

The common way to do it is a margin account. You buy stock, and use the stock as collateral for a loan from your broker, which you use to buy more stock (not necessarily the same one). You can profit twice as much from a favorable move, but you also lose twice as much from an unfavorable one. That's 2x leverage, you can use less. The broker also charges interest. The loan is fully collateralized, so if the shares you're putting up lose value, you have to pay back the excess loan. This situation is called a "margin call". You can also get leverage using options or buying shares in a fund that is itself leveraged in some way.

Leveraging down means the opposite, usually you keep some cash in reserve, and keep the ratio of cash to investment value balanced. For example, a portfolio of 50% cash and 50% stock has 0.5x leverage, assuming you keep it balanced as the value of the stock changes.

What posts on finance would your find helpful or interesting?

Short selling means that you borrow shares of stock to sell to someone else. You probably can't do this in a basic account or a retirement account (with some minor exceptions). Your broker will find someone on your behalf. Some stocks are hard to borrow. Your broker might not be able to find enough of them.

You're still on the hook for any dividends and have to compensate the original owner for any dividends they miss. Again, the broker should handle this automatically. If the market price falls, you can then cover your short position for less than you sold it for, which is a profit. The opposite case would be a loss. If you do have a margin account, your broker may also loan your shares to someone else to sell. Some brokers compensate you for this. If your shares are loaned out you still get the dividends, but they don't count as dividends for tax purposes.

Charting Is Mostly Superstition

Maybe the argument is something like financial markets have so much noise that you're more likely to accidentally overfit to noise rather than find real patterns that let you infer a useful model

That is pretty much my argument, yes.

Emotional trading is such a danger that I also want my trading to be in principle something that I could program into a computer, even if I do, in practice, execute the trades manually. This isn't compatible with "eyeballing it".

I do look at price charts. I use Heikin Ashi candles, Bollinger bands, probability cones, moving averages, volatility graphs, and I even eyeball support and resistance levels. But I mostly don't expect to predict the future with these. It's more about noticing when my initial assumptions have been violated, by past behavior.

but if that's the case that's a problem everywhere, and you just have to get more aggressive about dealing with it

I thought that's what I was doing. What else would you suggest?

up to some limit where there's simply not enough signal to determine anything useful.

I think this is the case in some markets. You can still sometimes get enough signal for alphas that affect multiple assets in similar ways, by trading ensembles.

The Wrong Side of Risk

Right. A call is an option contract. It's a different instrument than the underlying shares of stock. You can be short a call option and not short shares. You're still executing a bearish play on the stock, but you're not shorting the stock.

If you get assigned on your call (unless it's cash-settled), you will have to produce the shares to give to the contract holder. If you didn't already have the shares, you will end up with a short position in the stock, which you will eventually have to cover by buying stock.

You can construct a synthetic short stock position using options, by selling a call, but you also have to buy a put at the same strike and expiry. This will behave very similarly to (typically) 100 short shares.

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