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When is it okay for a passive investor to time the market?
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Super piece @TA.
Are the labels “active” & “passive” still (if they ever were) a useful shorthand? Or should they be retired?
It sets up a dialectic of two choices when, arguably, there is a continuum with, at one extreme, say:
– Someone like Jason DeBolt, the all in bar none, perma Uber-bullish, ‘one stock to rule them all’, Tesla investor; who, when down $11 m out of his $12 m 2021 net worth, all in TSLA, sold his house in January 2023 to buy yet more TSLA, again using leverage, and who vows to never buy another stock, or to sell TSLA (except to fund essential living costs and margin calls).
And, at the other extreme, say:
– Either Lars Kroijer, with a 100% global equities tracker, or perhaps something like the Cambrian Global Asset Allocation ETF (NB: not available in the UK, to my knowledge, because of the PRIIS rules).
I’d argue that all investment involves an active (preferences led) wide ranging set of choices.
Those choices are informed by changing circumstances, and normally include at least some of: other needs for capital, risk awareness/tolerance, issues of dependent provisioning, age/ life expectancy, retirement plans, ability to contribute investment capital through earnings, investment horizon and patience, and tax position and efficiency.
Maybe we should think (instead of active or passive) in terms of asking questions like: do we prefer systematic, evidence based choices or idiosyncratic judgement calls, a bit of faith & using intuition; i.e.:
– Belief in specific managers, companies and narratives; or in following rules based investing?
– If the latter, then whether whole market beta based; or Fama-French risk factor derived?
Buy & Hold market beta is, in at least one sense, arguably an ‘active’ strategy choice. It guarantees 100% whole-market upside capture, at the inherent cost of ensuring 100% whole-market downside exposure.
It’s also a very simple choice and, for a one ETF global equity tracker portfolio, something of a fire and forget strategy.
For the most part (but not exclusively) I follow it myself, but I’m relatively open to alternatives. Not so open minded though that my brain falls out. I just try not to over readily reject credible, evidence-based alternatives like, say, trend following momentum; albeit that they’re invariably much harder to implement, require far more attention, and likely carry a greater risk of failure for the prospect of higher long term returns (albeit, perhaps not with a higher rate of risk per unit of expected return).
With using a value filter, as you suggest, to temper a B&H strategy (whether equity only, or a mixed global equity/high quality bond one); this makes sense logically, but is it supported empirically?
Consider the (endless and irresolvable) arguements over the merits and demerits of using ‘extreme’ (high or low) CAPE readings, or for that matter some other set of metrics anchored to a particular set of preferred ‘fundamentals’ (e.g. forward or trailing PEs, P/S, P/B, EV/EBITA, GARP, EPS, ROIC etcetera etcetera).
As choices around valuation calls apply to equities, so those choices also apply mutatis mutandis to bonds or to any other asset class with fundamentals/intrinsic value properties (which I define as some underlying economic cash flows or returns; be they buy backs, dividends, interest, rents etc), i.e. as opposed to only extrinsic value, like with gold (jewelry apart), or say for BTC (where there is, frankly, no meaningful concept of valuation IMHO, as I don’t buy ‘network effects’ valuation models myself).
At times, assets with intrinsic value may look over or under valued, but there is no natural, given or agreed (by one and all) fair value point that they have to, or even should, trade at.
Sure. Statistically they may tend, on average, to somewhat mean revert. Money can be made off that, although it is well known about, and therefore at risk of becoming a crowded trade and/or arbitraged away. It also typically requires some sort of catalysing event to impart a bit of upward price momentum (which may or may not happen, and if it does, then it won’t arrive to any schedule).
But there is no law of nature operating here that any intrinsically valuable asset class has to trade trending towards some ‘equilibrium’ like rate of return/yield or to some stable ratio to something else.
The price is what the price is. The EMH may not be correct to say that the price is necessarily ‘right’ (whatever right even means here, if anything); but the price quoted in the market is definitely what you can transact for at at any time, whether (as a buyer) one likes that price as a being a bargain, or one loathes it as an ‘obvious’ bubble. For every buyer there is a seller, and the person on the other side of your trade may well take the opposite view to you on the over or under valued debate.
Perhaps ‘extreme’ valuation (by some definition) ‘works’ (in some sense) as a way to dodge the most epic market falls (or perhaps not) but, as an approach, it definitely comes at a price that it might not work, and may keep an investor out of the market when they either, with hindsight, should have stayed invested or should be buying back in.
If you were to apply Bernstein’s thinking against property it may have kept you from investing in that asset class for a long time?
I still believe that sticking to a passive strategy is the best bet even when market extremes come into play by diversifying globally using a Global Index tracker fund to reduce fees/costs.
In my humble opinion those in the accumulation part of their journey have benefitted over the last year-ish of lower stock prices following on from the highs of the year or so before. One of the previous weekend readings called it a down and sideways market.
Investing mainly via a pension on a monthly payday timeline means many people will buy the highs and the lows of the market as they accumulate. The only change in my strategy has been to increase my pension contributions due to a payrise.
It’s funny looking back at 2021 because everyone was asking what stocks to buy and how they could make big money quick. Even now though if the same happened again I wouldn’t have the gumption to sell much of my current assets in fear of the market irrationality continuing and missing out. I’m not clever enough to predict the market outcomes and it’s proven even the pros/active lot can’t do it over time.
Andy D4
Perhaps a view from the other end of the investment scenario might be useful ie 77 years old -20 years rtd and nearing the end game
Retired with enough and a 30/70 equity/bond portfolio-currently 33/62/5 equity/bonds/cash(3 Global Index funds only)
Never traded except for selling required number of units once a year to top up cash fund as required
Plenty of action moving cash about to get highest cash interest taxes ,reclaim tax if taking monies fromSIPP but that’s about it
Retiring at 57 meant a lot of travelling and time away from home -a fire and forget portfolio required
2002,2008 etc -many crises been and gone plus the constant background noise -“it’s different this time”
So far so good -steady 3.5-3-8 % withdrawal rate
Slept at night,no more stomach acid and excitement came from non financial areas
I do enjoy reading financial books and blogs and it is very important for punters self managing large amounts of money to be financially educated but no trading-so far for me for many’s the year
xxd09
As I recall xxd09, you have a global bond fund hedged to the pound which maybe didn’t get hammered quite as hard as UK gilts? If say you had held 70% in intermediate gilts you would be down by approx 1/3rd on that component of your portfolio which prob would affect your sleep?
I do agree with the premise, particularly with bonds, that you can see a situation where there is an obvious asymmetry between upside and downside and act appropriately. Naeclue has made the same point several times and I kind of wish I’d paid more attention. Still, painful experiences are excellent teachers.
> If you were to apply Bernstein’s thinking against property it may have kept you from investing in that asset class for a long time?
While it was personal experience rather than Bernstein that put me off it, I am at ease with not investing in this asset class 😉
@ermine (#6): if you’re a homeowner and receive UK source income, such that your main asset + salary/pension are in, respectively, property & £Stg; then there is a diversification argument against having any more exposure to property generally as an asset class or to UK property in particular.
@TA: BTW love the idea of bubble burst moments being like the Death Star coming into view, Turbo Laser to the fore. As Lucas’ plot themes in SW echo those of Frank Herbert’s Dune 12 years before (at least FH thought so), perhaps we should think of impending valuation bubble burst like the desert wormsign foretelling the approach of Shai-hulud; compelling us to either get onto safer ground with a different asset allocation mix, or to stand out ground and to start reciting the Bene Gesserit rite, “I must not fear. Fear is the mind-killer…..”
@TLI. The clear problem with “extreme valuation” is that you never know where to step-in. You think it’s over/undervalued but it just carries on going up/down.
As someone who has built his career from trading mean-reversion and finding extremes, the only real solution I’ve found is to locate cheap long convexity positions at those extremes. I don’t mean bond convexity (though that is related) but convexity in the broader sense of an asymmetric non-linear payout profile. You need to own things that pay out 10+ when it reverts and you only lose 1 if the trend continues. It’s the only way to hold the position whilst maintaining any semblance of risk discipline. The alternative is to say you can call the top or bottom which evidence suggests few can.
In my personal portfolio, I wouldn’t be without my long convexity mean-reversion trades. Since 2000, if I stuck with 60/40 I’d be looking at a 6-6.5%/annum return in USD. My actual return is over 14%/annum. Most of that has come from highly levered positive convexity positions (either in funds I own or with positions I’ve taken myself). The last five years, I’ve averaged over 22%/annum. I find it hard to take EMH seriously when I could by options on 2%+ rates in the US priced at almost zero probability in mid-2021. It’s now at 5-5.25%.
I fortunately took a view on bonds based on having a smallish element of defined benefit pension plus a state pension to look forward too. If you include these factors in asset allocation they can be viewed as bond like equivalents – guaranteed income and if you are lucky some degree of inflation protection. From a property perspective if you own you own house then you have exposure to that asset class too. I took these factors into account when figuring out my asset allocation and reduced bonds and property accordingly. Lucky move on bonds as some years prior I was sitting on traditional 60/40.
I have practiced Tactical Asset allocation moves at market extremes over the last 20 years, this worked out well until it didn’t !
My recent endeavours didn’t work out badly but a lot of effort was expended that made no significant difference. (My simple swapping between US Equities and US Bonds a week or so apart when the market is volatile worked out well on a small scale, generating a few K each time but there was little downside.)
I have had less success with the bigger moves over recent years, its getting harder, I’m dumber, I was lucky in the past…
I retired 16 years ago and the state pension is not far away, I’m not likely to want to go back to work, my need to spend from the portfolio is not that high.
Logically I structure the portfolio to meet my needs and consider the possibilities of what might occur and try and cover this with my asset pool. Its entirely about covering future spending.
I like the ideas that ZxSpectrum48 advocates but prefer to stick with more mainstream investment options.
I wonder if anyone has tried using AI-style tools to quantify market sentiment (or level of mania, if you will!) on a large scale, by trawling through many thousands of news articles, blog posts, and tweets, etc. My intuition is that this might provide a more empirical basis for dynamic or tactical asset allocation. It would at least be interesting to chart historical ‘market mania’ through time to see how it corresponded to actual market movements.
Rhino -for info
Vanguard Global Bond Index Fund hedged to the Pound
xxd09
@tranq (#9): intriguing perspective (which, reflecting on it, I agree with). A decent DB and State Pension coming into payment could substitute for some of the risk off asset’s % allocation (e.g. for AAA Global Sovereign Bonds hedged to £ within a ‘balanced’ (60/40) portfolio).
One still needs to consider personal risk preferences. Putting the balance that would have gone into bonds into equities carries with it higher volatility, bigger drawn downs & less predictability (in bonds there is, at least, yield to maturity).
But, if an investor is OK with those issues, then knowing that you’ve got watertight DB+State Pension means, all things otherwise being equal, you need to worry less about losses.
@Wodger (#11): I believe that a fair number of hedge funds are using machine learning to analyse social and news media. I’ve not yet heard public crowing from them about the results so, upon the basis that they’d probably shout from the rooftops if it was great performance (to increase client retention & their AUM) my best guess is that it’s working out for them below expectations.
Unless one of them has a sustained and meaningful ‘AI’/ML lead over the rest, then one might expect any ‘edge’ obtained to ultimately get arbitraged away in the absence, for their competitor funds, of obvious barriers to entry to the strategy .
@ZXSpectrum48k (#8): the problems with high convexity options trades (aside for their arguable lack of suitability and restricted available range for retail investors) is, more fundamentally:
– how to know when it might actually be cheap (i.e. premium mispriced)?
– We know the potential asymmetric payout and premium for a deep out of the money call or put; but we don’t know (either in advance or after the event) the real odds of the win scenario eventuating. – Black-Scholes-Merton pricing is no help here as the win scenario relies on fat tails outside the model.
– If anything BSM understates risk, as Meriwether, Scholes & Merton found out with LTCM. Two were Nobel laureates, who essentially founded modern options pricing. If they couldn’t get it right IRL, then what hope do we mere mortals have?
If we can’t know when an option is really mispriced (and genuinely offering a risk adjusted asymmetric return) then why should we assume we know more than the option writer/grantor and buy from them?
Years ago I found a pair of bargains in a 2nd hand bookshop – ‘Inventing Money, The story of Long-Term Capital Management and the legends behind it’ (Nicholas Dunbar, Wiley Finance, 2000, RRP £19.99) and ‘When Genius Failed, The Rise and Fall of Long-Term Capital Management’ (Roger Lowenstein, Fourth Estate, 2001, RRP £16.99) for a quid apiece I knew at the time of purchase that they were cheap, both for the knowledge they contained and for the enjoyment reading them would provide. But how could I ever say the same about the options’ and futures’ strategies which they describe?
So much of what we’d need to know to evaluate a strategy using options is outside the model and based upon the unknowablity of the future, specifically how it might deviate from correlations, relationships and trends in the past.
To take a quote from the headings in chp. 4 of each book, “time forks perpetually towards innumerable futures” (Dunbar, quoting Jorge Luis Borges, “The Garden of the Forking Paths”) and “In a strict sense there wasn’t any risk – if the world had behaved as it did in the past” (Lowenstein, quoting Merton after the implosion of LTCM).
@tranq #9
I also always regarded a DB pension as the equivalent of bonds, to the notional HMRC capitalisation of 16*net pension payable @ normal retirement age
I rather missed the same consideration for the State pension, however, which is a fair point
@TLI. I think both LTCM and option models aren’t relevant to this issue. LTCM was deeply short convexity when the Russia default happened. Combined with terrible collateral management and oops! As for option models, choose whatever you like. BS or BSM models are the stuff of textbooks and academia. Little to do with reality.
Really this is about dodging the big bullets and catching a few falling knives. Yes, it helps to own Kevlar gloves in both scenarios but there are clear situations where market pricing has very little to do with actual expectations or fundamentals and everything to do with position management and cascading failures of liquidity.
I always think early 2009 was a classic example. I bought 5y+ options on the S&P struck at 1400 struck at 5%. The market was offering me essentially 20:1 that the index could get back to where it was a year previously over the next 5 years. I know squat about equities but there was nothing in Mar 2009 that was worse than Dec 2008 but the index was lower. In fact, everything was better. Central bank had cut to zero, massive bail out packages, the market awash with liquidity. Banks were making money. Expectations were improving. Yet the market was totally bid for puts, so the put-call risk reversal was off the chart, making calls very cheap. Market pricing was all about position management. It wasn’t a comment on value. EMH doesn’t work in those sorts of periods. I could say the same about Mar 2020 or Sep 2022 for Gilts.
Looking at my portfolio over the last two decades, the “asset portfolio” (mainly equity trackers and bond trackers) is dull. It trundles along at 6% or so. A handful of trades (whether it’s buying a certain hedge fund, a currency trade, specific option, or futures position) have generated a very disproportionate amount of return. I don’t buy single stocks so I will never buy the next Amazon or Nvidia. I can, however, try to take advantage when the market decides to have a big sale not because the product is bad but often simply because they temporarily have too much inventory.
@ZXSpectrum48k
> I always think early 2009 was a classic example.
It’s an old one but a good ‘un, TI seemed to share your view though with a different exposition 😉
@ZXSpectrum48k (#15): Apologies (and to other readers also) that this is going to sound a bit philosophical.
The problem here’s akin to (but not the same as) anthropic shadow (AS), the weak anthropic principle (WAP) & the self-sampling assumption (SSA); i.e. should we be surprised to observe outcomes which we do observe; or put another way, does the fact that we observe an outcome mean that it was a typical (i.e. high probability) one within the landscape of all possible outcomes?
Some observations necessitate one or more of AS/WAP/SSA applying (e.g. the fact that we exist to observe the fact of our existence means we can’t deduce from our existence alone that there were high odds for our coming into being; and likewise say for the odds of us making it this far without going extinct).
For other observations though, it’s a more subtle issue (e.g. see the so called Sleeping Beauty problem, & the debate between thirders and halvers).
Whether non-observed outcomes are physically realised (as in the branching Everettian MWI of QM) or not (as in the Copenhagen interpretation, other local hidden variable models, Bohmian Pilot-Wave theory, and Objective wave function collapse interpretations); we simply don’t, (& can’t ever even in principle hope to) know the actual probability distribution across the landscape of all outcomes, or to infer it from the singular outcome that we do observe.
If you accept this must be so, then it means (I think) that, taking your example of March 2009: we have no deductive knowledge of whether the 5% odds given for the SP500 hitting a 1400 strike price (derived from the call option premium) was an over or an under estimate/pricing.
That the SP500 passed its 2007 (& 2001) peaks (>option strike) in 2013 actually tells us nothing a priori about the likelihood that it would have done so.
We observe what we observe because we observe it.
We can only inductively derive some useful a posterior information (from which to extrapolate) by having some knowledge of matters going beyond the mere act of observing what we do observe outcome-wise .
From the mere fact alone that the SP500 blew past 1400 1400 or <1400) was, and no way to find out.
I know that it must sound here like I've gone and swallowed the EMH Kool Aid lock stock and barrel; but I think that my argument is somewhat different in character to the EMH (even though it does assume, as EMH does, that where information relevant to asset pricing is widely and promptly disseminated then the wisdom of crowds is embedded in the asset pricing, and is at least as likely to be right/less wrong than for any randomly selected observer's own assessment of a 'fair' price).
@Time Like Infinity
While I have only the vaguest feeling of how ZXSpectrum48k does what he does, is it not reasonably well accepted that valuation matters – the expected future value of a market income stream is higher when CAPE valuations are lower. Arguably that was the case in early 2009.
I’d also suggest that the implicit assumption that there is an (inherently unknowable from the possible observations) “actual probability distribution across the landscape ” is unsafe. At best it isn’t stationary, indeed I would say that the stock market is more a psychodrama than a market at extremes. The fact that the fat-tailed extremes kill people in the market time, time and time again, but in different ways push back against there being a probability distribution in the landscape.
Something went wrong on clicking ‘Submit’, and what appears now as the nonsensical, “From the mere fact alone that the SP500 blew past 1400 1400 or 1400 to have useful knowledge. We don’t assume that the sun rises because it has in the past. We know it will rise again because we understand atomic chemistry etc. Similarly, we can’t say if, back in March 2009, the SP500 was likely to >1400 <5 years based only on its level then & past history of 5 year returns.
2. We don't get to live through the Worlds where 2009 became 1929. We have no reason to think it could not have become 1929 just from the fact alone that it did not. We need more inputs than that to draw such a conclusion.
3. We don't get to count the ratio between those 1929 like outcomes and ones like what we in fact lived through after 2009.
4. Given that ZIRP etc were all known about in March 2009, those matters, as open info., should have been in the call option premium price.
5. If one accepts both that we don't know the odds of 2009 = 1929 just from what happened, and that we don't have access to any privileged info. compared to what's known by the market, how can we say that the call option price was low or high?
I then gave @TI credit for in effect calling the bottom in March 2009.
At least, that's a bare summary of what I can remember typing.
I think I'll give posting a rest for a while. Before subscribing last month I'd never commented upon anything online before, both in 15 years reading Monevator and over 29 years having access to the Internet. I'm finding posting comments is quite addictive. It's been fun, but time now to go back to being a spectator.
Something in the middle? I’ve been enjoying your comments – and those of other former lurkers who’ve emerged since we introduced the membership tiers. 🙂
@ TLI – seconded! Don’t give up already – find a balance that works for you. I’m very much enjoying your contributions.
@ Hariseldon – given your experience with tactical asset allocation, are you considering giving it up? Or does it still serve a useful function for you? Perhaps even the act of ‘taking control’ is worthwhile psychologically?
@The Accumulator
I will be cautious with Tactical Asset Allocation in the future !
Bonds provide more scope at present, 2% real on TIPs are interesting and we have the option of moving from inflation linked to nominal and also to choose our mix of durations….the yield curve provides opportunities.
There may well be occasions in the future when the balance between bonds and equity can be moved if the sentiment of the market is at an extreme, the option will be kept open but these occasions are infrequent.
@ermine (14) I think I have raised this with you before, either here or on your own blog, but isn’t the HMRC capitalisation of DB pensions 20x annual payout at NRA? I’m sure this multiple was used when determining whether my AVC was within the 25% PCLS entitlement.
That said I’m not a fan of regarding secure income as bond equivalent. I much prefer the approach of regarding secure income as reducing the income needed from the investment porfolio, but still making the asset allocation in this consistent with individual risk tolerance. Even though I have enough secure income to live comfortably I have no appetite for excessive volatility in my investment portfolio. I know the counter argument is that the secure income allows for higher risk tolerance, but psychologically that doesn’t quite work for me.
@TLI. The idea that the price always incorporates the probability distribution of market expectations is wrong.
The forward price is a just a breakeven rate. It’s a trajectory of zero P&L and given by an arbitrage condition. Forward rates and expectations are nearly always different to some degree. There is always an element of premia (positive or negative) between the two. In periods where the market is highly distressed or being driven by flows that are a function of another factor those forward rates can diverge from market expecations to a very large degree.
I’d also point out that the shape of a forward yield curve or a forward volatility surface (to take two examples) is highly unstable. Imagine it like a local minima. It only requires the correct trigger to cause a rapid and large phase change or reconfiguration of those parameters. It’s almost like quantum tunneling (to give a physical analogy).
Take the Gilt move in Sep 22. That was driven initially by the Kamikwasi budget but actual market expectations for inflation, monetary policy or the fiscal position never reflected anything as bearish as what the market was pricing. The actual LDI funds were short duration and higher yields were improving their ALM position. This should have been a good result for them. They should have been buying long-dated Gilts to lock in their profit.
The problem was LDI funds had modest swap positions that were very deep ITM. So they had received huge variation margin on these. As swap rates rose they needed to pay that back T+0. First, they didn’t have the cash T+0. They had invested it. Second, the collateral they did have, short-dated Gilts for T+3, they were doing securities lending on them to T+5 to T+10. So they found themselves selling long-dated Gilts to meet margin requirements. The exact opposite of what they really needed to do. Dumping large amounts of duration caused chronic bear steepening, leading to further collateral calls. The doom loop etc. Most of the move was nothing to do with changes in fundamental expectations.
This problem was clearly going to go away once they got back the Gilts they were doing securities lending on. Money market funds were going to give all that back before quarter end (basically two weeks time). So the collateral issue would disappear. The problem is that they could default before then. So the BoE came in to save them. T
So the BoE came in to save the LDI funds. Instantly, the collateral issue went away but now they were deeply short duration vs. their index. So now they needed to buy all those long-dated Gilts back and sell the short-dared Gilts. Chronic bull flattening ensued. This is where they actually lost their money. It was a total configuration change for the market. Have a look at charts for Gilts on the last day of the month in September. The price peaked at the end of quarter close.
Moves are often totally driven by liquidity not value, not fundamentals. The market is efficient with respect to the liquidity parameter but not with respect to other parameters at those moments.
The calls at 1400 on the S&P in Mar 2009 were not as 5% because 5% was the probability the market assigned to 1400 in 5y+ time. Consensus estimates always have the S&P going up loads. Based on those they should have been priced at 50%! They were at 5% because everyone was long the S&P and were being told to risk manage their downside. So they were buying puts at say 400. To fund that they sold topside calls. To price the volatility surface correctly, the model parameters such as skew and vol of vol had to be moved. This resulted in very anomalous (cheap) high strike options. The price wasn’t a comment on market expectations. It was a comment on flows and the inability of option models to parametrize the market correctly.
As I said earlier you are catching a falling knife so you need Kevlar gloves. You need to constrain your downside if you are going to do this. You will lose more time that you win. It’s about payout though. When the market is distressed is the time when the wedge between value and liquidity becomes huge.
With huge thanks to @TI & @TA for their v. kind words of encouragement (#20+21).
As a posting newbie (but veteran reader), commenting is outside my own circle of competence + conscious of my lumbering, blimp-like rambles standing unfavorably in contrast to: the precision posting efficiency of more experienced hands, to the natural wit and humour of regular contributors like @ermine, and to the deep subject area expertise & exposition of finance pros like @ZX.
I’ll keep giving posting a go though, but at a slightly less frequent tempo.
A big thanks to @ZX for his v. clear & as always exceptionally well thought-out and thought through explanation @ #15, 24 & 25 (esp. 2nd para). Idea of an efficiency parameter being useful only under an appropriate liquidity constraint amongst best from 1st principles rebuttals to EMH fundamentalism that I’ve come across, & something I needed to understand, but without realising beforehand what it was that I was missing.
See now how conventional institutions are bound; regardless of their in-house, long-term, equity index price targets; to buy puts at almost any price to cover their long only equity exposure, and to write calls to finance the put premia; thereby setting up a liquidity driven systemic imbalance in the actual risk to return profile of calls v puts (and, in doing so, in effect disproving the strong version EMH, in those circumstances).
The one thing which I can’t get my head around though is: in such situations, why don’t (macro and/or event-driven) hedge funds just swoop in at scale & both hoover up the artificially cheap calls and write inflated price calls? (i.e. equilibrating the prices of each to something rather more approximating the ‘real life’ risk profile of puts, in the SP500 Mar 09 example, with expiration 5 yrs, strike @400 & 5 yr calls @1400).
Surely the risk less arbitrage opportunity here is just too strong for all but the very most conservatively positioned hedgies to pass up on the chance? I basically can’t understand how $100 bills are being left on the sidewalk.
Here’s a working link to Bernstein’s explanation, in case that’s useful: https://web.archive.org/web/20190125133146/https://www.etf.com/sections/features/20562-bill-bernstein-take-risk-off-the-table.html?nopaging=1