How would you express this trade?

[ertyu]

Before I say anything else, let me preface with saying I am still a major chicken and my money is in T-Bills. I am not looking for someone to tell me what to do, and even if you did tell me, I'd probably be too chicken to actually do it. Rather, this is me going through a macro thought exercise in order to practice creating a thesis and constructing trades around it.

So, right now, the consensus in various podcasts etc seems to be that the market isn't crashing immediately but that a second leg down is coming. Instead, let's assume I think something geopolitical* will happen and the fed will back up the truck.

* - no, idk what. "something."

So I want to bet on a crash up, possibly after a short term crash down.

I don't know when this will happen.

I have a couple of ideas:

- go long spy. wait. easiest. risk: spy might go down
- wait for drop, pile up. risk: opportunity cost of holding cash + drop might not happen.
- use long-dated options. buy the tails. risk: theta burn + options die. or even if in the money, i don't actually make any money. **
- express this through a position in us gvt bonds. TLTs and longer dated, I assume. Go long these and wait.
- buy an option on the index**

** possibly finance this through some sort of spread.

What would you say is the best way to construct a trade around this thesis and why?

[candide]

I think you might want to focus on bet sizing. Are you familiar with the Kelly Criterion? I also know that Joel Greenblatt has spoken of how he sizes his bets not just on how sure he is, but also on how likely it is to preserve his capital (ie not lose money).

You can either try to figure out your level of confidence in the thesis to size the bet you chose from your list of ideas (Kelly Criterion), or you could do a second step after you figure out how big the thesis bet is and then try each of your options, sizing them differently based on either Kelly or Greenblatt's idea.

With all that said, your thesis seems to be that a geopolitical event might happen and that may be the catalyst for the market to go down. And, one day the Fed won't be able to raise interest rates any further. I think these are both just truisms, and the only thing playable about either of them would having special knowledge of when the events are going to happen. Absent particular knowledge, your bets should be relatively small -- or just seen as part of a well-balanced portfolio.

[ertyu]

I think you might want to focus on bet sizing. Are you familiar with the Kelly Criterion?

I know what it is, but I'm not there yet. I'm now at the stage of trying to sort out what there is to do; how it should be sized, by itself and in relation to other positions, is a later step

[jacob]

Focus more on arguments as to why this melt-up would happen, who that would make it happen and their particular implementation, and how to identify it when it does happen.

The technical details are easy and it's tempting to focus all the attention there. Yet that's like wanting to go fishing and spending most of the time researching reels and poles instead of understanding the fish.

[WFJ]

One could use a Bull Call Spread with this in mind. Basically, one would buy a call option at a low price then sell a call option at a higher price on the same security and same expiration date to help finance the purchase. A simple example would be to buy a SPY 4,200 October call and sell a SPY 5,200 October call. The owner of the Bull Spread would make money on the trade up to SPY 5,200, then be flat on all gains above 5200. Most discount brokers provide a plethora of tools that will provide an amazing level of detail on each side of the trade and combination, that was done by hand in the past.

The why would be to limit the cost of the trade relative to just buying a call.

https://www.investopedia.com/terms/b/bu ... he%20gains.

[ertyu]

Focus more on arguments as to why this melt-up would happen, who that would make it happen and their particular implementation, and how to identify it when it does happen.

so from what you're saying, what's needed is (1) a macro thesis based on various indicators etc and (2) a market thesis - how various actors would react and why

For (2), who should I consider? The major groups of participants that come to mind are:

- Fed
- Retail
- Pension fund managers
- Risk parity eg Dalio
- Hedge funds
- Politicians
- CEOs
- market makers: the guys that take the other side of the market's option plays and hedge them
- International actors.
- major indices reballancing (blackrock, vanguard, etc)

Am I missing anyone, and what would you guys say is the relative importance of each group? I assume which group is most influential changes over time, too

[classical_Liberal]

Analogy

You have an amazing, beautiful, and complex understanding of the tools and processes required to build an amazing monument. However, none of that matters if you don't, first, look at the ground that monument is being built upon.