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hi there it's mark sebastian the founder of option pet calm and this is the option frequently asked questions reminder this for education purposes only should be considered best advice options to carry some risk hate starting on thursday as our big black friday sale it's gonna be half off everything in our store which you can find in our courses and then on small business saturday we're gonna have an extra special deal on our gold membership which will be very limited supply we're gonna offer you know very few at that special price and then we're gonna offer even fewer on monday of our platinum level at a crazy inexpensive price so uh you know good AFRICOM unit check things out and please like and subscribe this youtube channel share leave a comment ask me questions i'll answer your questions for you so today i want to talk about this article so this is a article from The Wall Street Journal on radio and bridgewater making a one and a half billion dollar bet on options now interestingly I had been called prior to the publishing of this article to consult on on a couple of factual pieces on on what they're writing just they just want to make sure they had everything correct and one of the things I said well was the way you're kind of presenting this in terms of being an option fed on a falling market it is really not correct and I explain why and then Ray Dalio came out and basically confirmed my suspicions so what I thought I would do for today is explain what is Ray Dalio doing and why is the Wall Street Journal piece on Bridgewater incorrect so I'm going to show you this is thinkorswim they just got blocked by Charles Schwab this week and I'm gonna show you a very very general idea obviously way less expensive version of what the Bridgewater position looks like so this is long the march 275 puts in sp why you can see SP why as we're recording this tray about three hundred and thirteen dollars and fifty five cents and looking at my chart here I want to show you what the P&L of this position looks like I'm long ten of the 275 puts so if the market drops what I want you to notice is that in fact this position makes a lot of money alright the sooner it drops the more I make and the quicker I make dollars right at two hundred and fifty dollars so that would be a nice 20% drop in s py my ten lot of puts would be up about twenty-six thousand dollars today twenty-two thousand dollars AB March expiration and and I don't want to throw in any changes in volatility any let's let's keep thing kind of simple alright so this is the way the Wall Street Journal reported the position so here's the issue is that Bridgewater is not naked these puts they have an alternate position against it which is essentially and this is again simplified long SP why so long SP why for three hundred thirteen dollars you can see down at two fifty I'm losing about $95,000 all right relative to my you know relative to what I where I'm at now which is flat ok real simple right it's the same thing right if I'm long 15-under shares which some long every point that SP why losses I lose $1,500 $1,500 so down 20% you'd lose you know about a hundred thousand bucks on 1,500 shares makes sense right so then what if I combine these two positions what does this do to my trade well take a look now you can see at $250 instead of down 95,000 I'm only down 69 thousand and as we drop further I'm losing less and less at $200 I'm only lost 97 thousand whereas I'd be down about $175,000 at 200 bucks if that happened today now there's an additional component involved here called volatility and if you're somewhat familiar with the VIX what we know is that if we drop 20 percent the VIX is going to go high well options are sensitive to increases in volatility so if the VIX goes up generally long options make money so I'm gonna say the VIX goes from 11 where it is to let's say 30 so we're gonna raise implied volatility 20 points so now let's look at my 250 bucks again so remember I'm losing 95,000 if I'm naked now I'm only losing fifty nine thousand instead of sixty nine thousand dollars so my position is actually doing better so what is the whole point of this well by having this hedge on when the market takes that dive if he thinks the market is going to take that dive here's what they can do they then sell their option position so I would create opposite order I don't want to analyze an opposite order all right but I'm going to sell it at about seventy five dollars all right so now I'm at 200 and $25 I am down about 60,000 bucks and I'm naked long stock again but I've pocketed seventy three thousand dollars that I made from selling my option so essentially hedged off a lot of my downside risks so I can then choose to get new exposure in the market or if I'm that terrified I can go in and buy more options but that is the basics behind what he is doing the bet the headline that you read in the Wall Street Journal on the fact that the markets gonna fall is incorrect what it really is says is that he's hedged because here's the important part to remember if we rarely twenty percent from three hundred thirteen up to three hundred seventy he makes eighty five thousand dollars on this position if we drop twenty percent to that 250 he loses fifty nine thousand dollars on this position so he still wants the market to go up he still wants the market go up he's just protecting himself and his investors in case the market does fall and with the S&P at an all-time high he'd be kind of silly not to and irresponsible for a good fund manager not to set up a hedge so that is the real basic fundamental eight minute throw down on what they're trying to do at Bridgewater and why his statement that we are not as a whole in our entirety making a bet on a short market we're making a bat on the market going up and there you have it folks all right again please like subscribe and ask questions to this YouTube channel and make sure you go to option pit on Thursday and Friday for our awesome Black Friday specials I look forward to talking you guys soon call us eight eight trade zero one or email me mark option for calm with questions now a great day
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