If econ/market improves, will companies consider long puts on SPY/their industry?

Discussion in 'Options' started by JJacksET4, Mar 7, 2009.

  1. spindr0

    spindr0

    Jjacks,

    When airlines hedge the cost of fuel, they're hedging something that they know about. If fuel costs "X" then profit is "Y". So they hedge to keep their business going. But when you buy puts on the competition, you're making a bet on another company's management, labor, etc. not your own fuel costs.

    If the company wanted to hedge their own business, something that they supposedly know about, buying puts on their own company would make sense to me - assuming that's legal since I'm a trader not a fundamentalist, hence I have no clue.

    I think it's an apples and oranges comparison. You don't. So I guess this is where we're going to have to respectfully disagree and leave it at that.

    As for your example of Wells Fargo buying baskets of puts in C, JPM, BAC, etc., you have the benefit of hindsight during a Black Swan event which happens very infrequently. Yep, it would have been a good idea this time and would "keep the company itself together through tough times". But how often do company survival threatening events occur? You think it's always a good time hedge. Evidently, companies do not. And on the individual level, I believe it's better to go to cash and use puts for profiting from the down move, not hedging it.

    And I don't think that AIG and others are failing because they were unwilling to change. Simplistically, deregulation and change is what caused the sub prime crisis. Not understanding the risk of the "new paradigm" is what buried them.

    In normal times, banks get a large percentage of their profits from fees so there's good reason for them to worry about getting their stupid $10 (g). But here we are in agreement, their ignorance cost many their jobs, their retirement funds and in many cases, their companies.
     
    #11     Mar 8, 2009
  2. Spin, I am working under the assumption that it wouldn't be legal for a company to buy puts on themselves (or at least would look very suspicious), therefore, buying puts on very similar companies would be their hedge. I also don't know about the legalities involved. I am even assuming it might not be legal for a company to buy puts in an index they are a part of (i.e. WFC buying XLF puts).

    I agree.

    I agree that "Evidently, companies do not.", however they have been shown to be incorrect during this time. It's kind of like keeping yourself in good health to hopefully avoid a heart attack - it might never come and if it doesn't you won't even know if keeping yourself in good health was the reason, but if a person doesn't exercise and eat right and then a heart attack occurs especially at a young age or whatever, that person will wish they had taken steps to minimize their risks.

    And that would be one of the beautiful things about this kind of hedge - they would have hedged unknown risk that they didn't understand or expect. If you hedge known risks (again, such as oil) that is fine and dandy, but if a risk blindsides you and you really couldn't have seen it coming, that is obviously harder to have hedged against - this could at least minimize that risk somewhat albeit maybe not totally.

    Yes, again - they have failed to change with the changes in the market. They might feel more sympathy from average people who aren't even in the markets about getting bailouts, etc. if they didn't charge the $10 fees for stupid little things - right now, I don't think many people like BAC, WFC, C, AIG, etc, etc. because of little fees they were charged or interest rates or premiums that were raised with little or no notice.

    JJacksET4
     
    #12     Mar 8, 2009