http://www.wsj.com/articles/pensions-play-with-puts-for-protection-1471777202 http://www.zerohedge.com/news/2016-...etch-yield-strategy-truly-2006-all-over-again Thought this was interesting.
In overvalued and overbought markets, this strategy is not bad at all. You lose less than being invested if things turn around. At the same time, if they continue upward, you make some. Being in cash might get you fired as stocks continue higher. Its a conservative way to get long exposure
We can all look back with hindsight and say I wish I'd bought/sold ABC stock at x etc. For me, the only trade I missed which really pissed off is not shorting puts towards the end of the 2008/9 mega dump when volatility was basically pricing them for the whole stockmarket to go to near enough zero. In effect there was almost no risk in selling the puts and holding out till expiry assuming you margined yourself correctly and didn't get greedy. The price of the puts then is also a classic example of why in times of big market stress ALL fundamentals and logic disappear and it's very possible for people to sell $10 bills for $5 and be happy about the trade (phew, I got out)! That for me was the trade of the decade and I often say to myself 'how did you miss it, what were you thinking etc'. The only thing in my favour is I hardly ever trade options so maybe I just wasn't concentrating and got slightly caught up in the crowd (not the crowd as in people, the crowd as in price action, there's a big difference). As for the institutions selling them, they should understand there's a time and a place for selling puts and that time is certainly not 7+ years into a bull market and at all time highs. They might get lucky and make a few basis points (I doubt vol is high so big profits won't be available) but then they might get unlucky and one thing you don't want is to be short puts at low vol and then unlucky...
If the headline read, Pension funds invest in stocks, you would think that's fine, they should have some equity exposure. If they added that they sold some calls on stocks that they owned, you would think that's fine too, they are bring in some extra money and limiting their risk. Selling puts is viewed as some super risky strategy by many, while it is the same as selling calls on stock the pension fund may own. In fact it is usually a better strategy as there is less slippage, commissions and you get the implied short stock rates in the puts you sold. The key is how much leverage they are taking in selling the puts. Are they selling out of the money Index puts and risking a large percent of their assets?
It may make a lot of sense for these types of investors, but the devil is very much in the details...
The bottom line here is that these guys are pros and get paid big bucks for investing OPM. They really should know what they're doing, but I realize that that can be an idealistic and naive viewpoint. I couldn't read all of it, but it did mention cash-secured puts, implying no leverage. But it still doesn't answer how much of their assets they are risking with this. I know from personal experience that the "scramble for yield" can be a frustrating endeavor.
What peaked my interest was "The Hawaii pension is dedicating over 10% of overall assets to put writing in an effort to "mitigate risk." " That's $1.6 billion stepping in with volatility at relative lows already, expecting to be 'fully invested by October' (didn't see a start date, but presumably post Brexit?) I don't have an idea to the average daily/monthly notional value in S&P puts or anything like that, but, I conjure up the image of a couple of obese guys stepping into a hot tub already packed with people.
If they're just selling puts on $1.6B of stock, which is what it sounds like reading between the lines, the impact won't be that great. Zerohedge can generally be depended on to gloss over key facts to make the impending doom more sensational.
word. putting 10% of assets in a covered call writing type strategy is far from chasing risk or anything like that