Our financial system is crumbling this week.

[maddash]

You're betting against yourself, so to speak. I guess it comes down to a different set of investment philosophies - long versus short, investment versus speculation - but if you're using put options for hedging, you're playing the short game and investing in stocks you're not confident in. You're also betting against the clock, and trying to gauge market directing in limited time frame. Even the experts have trouble doing this.

If I'm a hedger and I short a product, that means I have too much exposure (risk) to that product (like oil) and I want to soften the blow if the market moves against me. Additionally, If I'm hedger buying a call vs a put depends on the prices for the strikes, and what I'm looking to do. Hedgers make no attempt to predict the market, only speculators try to predict the market. Their only function is to reduce risk.

I'm still wondering why you'd need to hedge a basic commodity like oil if you're over exposed. If you don't trust the market, why not just sell? Take the money you're using for the option premium and put it towards an investment you trust.

[greenback44]

You're betting against yourself, so to speak. I guess it comes down to a different set of investment philosophies - long versus short, investment versus speculation - but if you're using put options for hedging, you're playing the short game and investing in stocks you're not confident in. You're also betting against the clock, and trying to gauge market directing in limited time frame. Even the experts have trouble doing this.

If I'm a hedger and I short a product, that means I have too much exposure (risk) to that product (like oil) and I want to soften the blow if the market moves against me. Additionally, If I'm hedger buying a call vs a put depends on the prices for the strikes, and what I'm looking to do. Hedgers make no attempt to predict the market, only speculators try to predict the market. Their only function is to reduce risk.

I'm still wondering why you'd need to hedge a basic commodity like oil if you're over exposed. If you don't trust the market, why not just sell? Take the money you're using for the option premium and put it towards an investment you trust.

One possible answer to this question is that options are one-sided in nature. If I buy a put, then I still have the upside. That doesn't address short-selling, whose social good I cannot detect.

I'd hope there are other reasons however, because if insurance is the only legitimate purpose of a put (or call), then sellers of these things should be regulated the way insurers are regulated.

[dangerous]

You're betting against yourself, so to speak. I guess it comes down to a different set of investment philosophies - long versus short, investment versus speculation - but if you're using put options for hedging, you're playing the short game and investing in stocks you're not confident in. You're also betting against the clock, and trying to gauge market directing in limited time frame. Even the experts have trouble doing this.

If I'm a hedger and I short a product, that means I have too much exposure (risk) to that product (like oil) and I want to soften the blow if the market moves against me. Additionally, If I'm hedger buying a call vs a put depends on the prices for the strikes, and what I'm looking to do. Hedgers make no attempt to predict the market, only speculators try to predict the market. Their only function is to reduce risk.

I'm still wondering why you'd need to hedge a basic commodity like oil if you're over exposed. If you don't trust the market, why not just sell? Take the money you're using for the option premium and put it towards an investment you trust.

A farmer is long the commodity and is not able to sell until harvest so he can short the market to lock in a price. A dentist is short (needs) silver for fillings so he can buy a future to allow him to profit if silver prices go up.

[cpebbles]

I'd hope there are other reasons however, because if insurance is the only legitimate purpose of a put (or call), then sellers of these things should be regulated the way insurers are regulated.

Not the best way to put it in light of this economic crisis. Of all the various misdeeds done by people and industries to lead to this, the most outrageous part is that insurance companies were allowed to charge for a service (Insuring these investment vehicles) that they simply could not perforrm.

[Michael]

You're betting against yourself, so to speak. I guess it comes down to a different set of investment philosophies - long versus short, investment versus speculation - but if you're using put options for hedging, you're playing the short game and investing in stocks you're not confident in. You're also betting against the clock, and trying to gauge market directing in limited time frame. Even the experts have trouble doing this.

If I'm a hedger and I short a product, that means I have too much exposure (risk) to that product (like oil) and I want to soften the blow if the market moves against me. Additionally, If I'm hedger buying a call vs a put depends on the prices for the strikes, and what I'm looking to do. Hedgers make no attempt to predict the market, only speculators try to predict the market. Their only function is to reduce risk.

I'm still wondering why you'd need to hedge a basic commodity like oil if you're over exposed. If you don't trust the market, why not just sell? Take the money you're using for the option premium and put it towards an investment you trust.

Hedging is not an investment to make money, it's more like insurance. Exposure doesn't always mean you own the product, but your business is impacted by the direction in price. If I'm an airline company, I want to have cost certainty in regards to oil. If I export a lot of products to Japan, I want to have cost certainty in regards to exchange rate on the Yen. If I'm a farmer I may want to lock in price a corn even before I even harvest.

edit - I should note most of the activities above are done in the futures market. the options market tends to have more speculating.

[greenback44]

I'd hope there are other reasons however, because if insurance is the only legitimate purpose of a put (or call), then sellers of these things should be regulated the way insurers are regulated.

Not the best way to put it in light of this economic crisis. Of all the various misdeeds done by people and industries to lead to this, the most outrageous part is that insurance companies were allowed to charge for a service (Insuring these investment vehicles) that they simply could not perforrm.

AIG owns an insurance company (well, a bunch of them actually), but its credit default swaps were not regulated in any way remotely comparable to, say, its life or health insurance products. Cassano's junk was not part of insurance operations.

EDIT: Thinking about it some more, I don't know that something like what Cassano did for AIG would be allowed at all in an insurance realm. There's not a whole lot of risk reduction through aggregation of default risk. If anything, risk is created as bond defaults tend to correlate.

[sighyoung]

Japan's Nikkei Index has plunged 10% at the start of trading.

[Arthur Dent]

That doesn't address short-selling, whose social good I cannot detect.

What's wrong with short selling? I think more people betting against the price of tech stocks or homes could have done us a lot of good.

[docellis]

last night a guy on NPR said that ultimately this is China's fault as the "lender" in the relationship with the US.

[greenback44]

That doesn't address short-selling, whose social good I cannot detect.

What's wrong with short selling? I think more people betting against the price of tech stocks or homes could have done us a lot of good.

These events suggest to me that short-selling isn't a particularly effective means of containing bubbles. I'd guess that's because the goal of short-selling is less to discourage bad behavior than to find bad behavior and exploit it. Yes, short-selling provides a financial incentive for uncovering this bad behavior, but usually that kind of discovery starts after Wile E. Coyote has run off the cliff; even if he hasn't started falling down, he will shortly, and that doesn't do the public much good.

My morality says that investment is supposed to be about helping a company build factories or make (good) mortgage loans, even if it's indirect through the resale price of stock. I don't see any of that with short-selling.