Can you explain derivative trading? Serious question. I don’t know. I’m just a 57 year old who said no to himself his whole life, invested in stocks, mutual funds and bonds and now worry about the “fundamental change” of America.
Money pros with a true risk tolerance sometimes make money like MAD in times like this when the markets are very volatile.
(1) Buy S&P 500 call options. (Gives you the right to buy S&P 500 [at today's prices in the future] when prices are higher) also (2) Buy S&P 500 put options. (Gives you the right to sell S&P 500 [at today's prices in the future] when prices are lower)
(3-a) If market rises a bunch, exercise your call options. You pocket the difference between the selling price at the future time of the sale vs. the purchase price at the current time, less the 'premium' for being able to buy the call options in the first place. (*) The the market falls, then your call option (at the pre-negotiated deadline in the future) expires as worthless.
(3-b) If market falls a bunch, exercise your put options. You pocket the difference between the price of the S&P index now vs. the price of the S&P index after it falls. (*) The the market rises, then your put option (at the pre-negotiated deadline in the future) expires as worthless.
This strategy is a hedge to make money when the prices rise really fast and big in a short period, and then fall really fast and big in a short period.
If you the markets are not highly volatile, then you lose the 'premium' that you pay when buying the call option ... same as for the put option (you lose the premium paid for buying the put option).
FINAL NOTE: My wife can't stand this kind of risk, and so the RememberTheDanny family doesn't do this anymore.
I'll sell call options. I just make sure the strike price is about the current price. That way I get a little cash no matter what. If the stock goes down, it's no big deal I wasn't selling anyway and I got extra income. If the stock goes up to above the strike price I still sell the stock above what it was worth when I sold the option. So I got the cash and my stock went up and I sold it higher. In that case, I just didn't make as much as I could have.
I've sold put options before; if the stock goes up then the put option (bought by someone else) is worthless, and then I make money. If the stock goes down, then I owe however much the stock goes down. There is a theoretical 'floor' to your losses from a bad luck 'sell call option' strategy.
But while I've bought call options in the past, I've never had the stones to sell call options. There is a theoretical infinite 'ceiling risk' to the seller of call options, because of the stock keeps going and going up, then the amount of money which you must fork over to close out your position can end up being enormous.
Imagine how many people lost their ever loving rear ends by selling call options on Apple.
I only know enough to be dangerous, so hopefully someone who’s a pro in this area will correct me if I’m off base.
They’re basically tools used to hedge investments. Can be applied to commodities, assets like stocks, or currencies. Honestly, they’re like placing a wager on the future value of something.
Commodity derivatives are futures—-you’re agreeing to buy or sell a commodity at X price at some point in the future. If you’re a buyer and you think the price is going to be much higher in 60 days, you buy futures to purchase that commodity at a price you presume will be lower. If you guessed right, you win. If you guessed wrong, the other holder of the future contract wins and you lose.
With stocks, it’s even moreso like placing a bet—-the derivative value IS the bet….you are not even buying shares of that stock, you’re just predicting what it will do. So if someone thought stocks were going to tank this year and bought derivatives with that loss trend as their position, the value of their derivative contract goes up as the stock goes down, and again, the person in the other side of the contract who thought the stock price would remain static or increase now sees the value of their derivative contract go down.
If you watch the Big Short, the guys who stood to get rich were the ones who bought derivative contracts predicting the value of the bundled mortgages would plummet. They were right. Unfortunately, derivatives also aren’t always regulated, and just like those guys got screwed, so can you if your contract is with someone who defaults. Caveat emptor.
to paycheck. Others don't live paycheck to paycheck but only have a few hundred left over every month for vacations and extra wants not needs.
As long as your pay increases more than inflation, you are good. Most are not getting 9% raises this year.
Those are the people that hurt the most.
My advise to my young adult children has been. 10 percent minimum to 401k. That is just your adjusted salary. Second budget your spending based on 80% of your salary. You might have to find a new job and it might not pay as much. (Well it turns out that this works for 10% inflation too, but I did not realize it at the time)
Hopefully if you are over 50 or so you have a good enough cushion. Bonds are getting hammered like stocks are BUT if you buy individual bonds in a ladder it doesn't matter. The face value does not change. As the bond gets close to maturity it will be trading near the face value if not almost exactly the face value. As the bonds mature you get some cash flow to use or reinvest.
Stock market is down, use bond money to live on. Stock market is up, sell stocks to live on. Re-balance after things settle.
Your mortgage (if it's a low interest rate & fixed rate mortgage on a house) is a GREAT place to be right now.
Use your cash to buy US Gov't I-Bonds, which are tax deferred 'guaranteed by the Fed. Gov't against default risk' (whatever that means these days, but I digress) whose interest rate payout is linked to the inflation rate.
Even though the Fed. Gov't cheats on their 'inflation rate' reports, when inflation is really steaming away as it is now, the I-Bonds are paying nice rates.
The interest rate (i.e., earnings) on your I-Bonds exceeds that of the mortgage loan rate than you own.
The other part of the trick is to have squirreled away enough unencumbered money so that you don't have dip into your I-Bond money to make your mortgage payment.
I think the 2nd and later COVID relief packages went too far...but those started under Trump, with him pushing for more before he lost the election. Don't think you can hang all of that on the dems. Certainly the last relief package was all on the dems...no argument there.