RE: Reddit slamming the big shorts

The smart ones, anyway.

But I also think that it’s a mistake to look at this in normal, financial terms.

I don’t think the Reddit guys are acting as rational financial operators in the sense we normally think. 

I think the right way to visualize them is “vandals”. I think this is a continuation of an existing “deconstruction” trend. This is the same impulse that was behind tearing down Civil War statues, “cancelling” Thomas Jefferson, and all the rest. 

Before it was closed off, I spent some time reading WallStreetBets. Essentially every post was something to the effect of “We’re finally sticking it to the big guys!”. I can’t shake the feeling that the little guys (the one’s who threw their $600 stimmy check at this, let’s say) are getting played by bigger operatives, and it’s those bigger ones who are making all the money.

******

FWIW, and it’s not much, but since we’re talking this stuff.

I have two accounts. Cash and an IRA. The cash account is split, more or less evenly, between QQQ (NASDAQ index ETF) and SPY (S&P 500 index ETF). No excitement there. No huge swings either.

The IRA is maybe a little more interesting. That’s all in Berkshire Hathaway “B” shares, but I use covered calls and cash covered puts to increase returns. If I’m in the stock, I’ll sell slightly out of the money calls, about 30 days out. If they get exercised, I’ll turn around and sell slightly out of the money puts. Other than taking most of last year off on the options (since the covid stuff crunched the stock), I’ve been doing that for years with pretty good results. I can’t count how many times I’ve been in and out of the stock, but since it’s all tax deferred, it doesn’t matter. Couldn’t do this in a taxable account.

I like that strategy because it, well, just works. I’ve averaged a little better than 20% over the years. Mostly, I like it because I consider it almost entirely riskless, particularly on the downside. The worst thing that could happen is that BRK.B tanks and I end up being stuck with it. But I consider BRK.B to be super-safe, so I’m really not worried about downside risk.

The second worst thing that could happen is BRK.B rockets up and I miss out. (If it shoots up big time, my calls will get exercised and I’ll be out of the stock.) But there is little reason to think that a boring stock like this is going to suddenly catch fire, and even if it does, the risk is only one of forgone profits, not loss.

As an example, I entered 2021 holding the stock, which was sitting at about $235/share. On Jan 7, I sold Jan 29 calls with a strike of $240, and got $2.00/share for them. Right now, shares are at $232.50, so unless something really unexpected happens, those calls will expire tomorrow. On Monday, I’ll sell another round of calls with a February 26 expiration and do the whole thing over again.

Which gets to the last thing I like about this strategy: It is simple. All I need to do is make one trade a month.

 

 

Be the first to post a comment.

Add a comment