

Cool Derivatives and Bank Consultants - jackgavigan
http://www.bloombergview.com/articles/2015-08-19/cool-derivatives-and-bank-consultants

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roymurdock
Vest's value proposition is very weak in my opinion.

The service is meant to solve the problem demonstrated by a recent Goldman
Sachs survey: only 18% of millenials think that the stock market is the "best
way to save for the future". If someone can figure out how to get more
millenials investing, they could make money off commission, brokerage fees and
the like.

First problem: Options are usually built for savvy investors who operate on
short-mid term time horizons and with volatile/uncertain underlying assets.
Not millenials who want to earn market returns through an ETF or hand-picked
portfolio of blue chips + hot tech stocks. Options are not a solution for
long-term investment strategies - diversified portfolios, index funds, and
ETFs are.

Second problem: If I really cared enough to add some downside protection to
going long on Google, Coke, Visa, etc. I would literally just google "how to
place a stop loss order etrade" and find this article [1] that describes how
to set up an automatic limit: enter stopping price, specify whether it's a
stop on quote or stop on limit order, specify whether to buy or to sell,
specify how many shares, execute. So why would I pay a non-negligible
percentage of my upside on top of the option premium for something that I
could do myself in literally 2 minutes?

The reason we don't trust the stock market is because the financial sector has
a reputation for greed, corruption, and manipulation which will inevitably
lead to another economic calamity coupled with a stock market crash. Making
options marginally more accessible to casual investors is not coming close to
solving this problem.

[1]
[https://us.etrade.com/e/t/prospectestation/help?id=130102000...](https://us.etrade.com/e/t/prospectestation/help?id=1301020000#Stop)

~~~
ryandrake
I'm not sure how providing yet another way to trade options is a good way to
get millennials to invest, if they don't think the stock market is the best
way to save.

Quite honestly if I was a millennial (I'm close), I would not even be thinking
about saving, let alone gambling on the stock market, given today's economy.
My financial worries would be about exorbitant, growing rent payments, the
huge burden of student debt, a dim and worsening job market, automation (which
hits low-skill and low-experience workers hardest) and the disappearing
opportunity to own a home and start a stable family.

Telling millennials to gamble their nonexistent disposable income on Wall
Street financial products is kind of tone deaf, given the economic outlook for
this generation.

~~~
cryoshon
Yes, your reaction is similar to mine. I am a millenial.

Maybe once there is stability again there will be investment from millenials.
Otherwise, it's another laughable instance of Wall Street not understanding
Main Street, as trite as it sounds.

------
noname123
I trade options and was curious about the Vest startup:
[https://www.vestfin.com/](https://www.vestfin.com/)

I think how they manage their risk is buy buying a covered call and put for
their customers on the open market:

e.g.,

To replicate their SPY hedging strategy by Jan 15th 2016 here:
[https://www.vestfin.com/build-
strategy/?symbol=SPY&preown=fa...](https://www.vestfin.com/build-
strategy/?symbol=SPY&preown=false&quantity=100&leverage=1&expiry=2016-01-15&gains=235&protection_top=210&protection_bottom=178&physical=false)

SPY is trading at 209.93;

"Select how much upside gain you are willing to cap at (235)", so sell a
covered call at 235 that expires by 1/15/16; current options market: $0.04
credit

"Select how much downside risk you are willing to lose to (178)", so buy a put
at 178 that expires by 1/15/16; current options market: $2.02 debit

Cost basis to implement via open market: $1.98/share

Cost basis to implement via Vest: $5.11/share

So their profit margin should be: $3.13/share or ~$300/option contract
(account $13 for their commission and margin fees); now add their 0.5%
management fee for the dollar value of this 100-lot SPY position (21504*0.005)
or $107.52.

So the total profit they make per 1 SPY option contract is: $407.52!

And their active management involves only and only buying and selling these
two option positions at the get-go!

If so, this is a pretty good business to get into!

Can someone else enlighten me if I did the math wrong here or I'm missing
something here that I didn't account for their active management?

~~~
jackgavigan
It's slightly more complex than that because they're "protecting" you between
$178 and $210. If you scroll down and click the "Preview Your Strategy"
button, it'll show you exactly what they're going to do.

So, in your example, they would:

Short SPY 2016-01-15 call option with strike price at $235.00

Long SPY 2016-01-15 call option with strike price at $210.00

Short SPY 2016-01-15 put option with strike price at $178.00

The net cost of that (including commissions) would be $516.24

They'd also retain cash of $21,000

If the price ended above $235, you would exercise your option to Buy @ $210
(using the $21k cash), but would be forced to Sell @ $235, so you'd end up
making a profit of $25 per share (i.e. $25,000 in total).

If the price ended below $178, you would be forced to Buy @ $178 (using
$17,800 of your $21,000) and you would then sell at the market price, losing
up to $178 per share. You'd also get back the unused $3,200 cash.

If the price ended between $178 and $210, you wouldn't do anything, nobody
would exercise the options you'd sold them and you'd get back $21,000 in cash.

If the price ended between $210 and $235, you would exercise your option to
Buy @ $210, and you would then sell at the market price, so you'd end up with
somewhere between $21,000 and $25,000.

~~~
noname123
Thanks jacksgavigan, I misread. Now I see the option positions that they're
doing, I missed the fact that they are doing a bull-put spread and then a
covered call.

Looks like they only make money on asset management fees and also commission
fees; not on the spread of the option positions.

~~~
jackgavigan
Don't forget the interest on the $21,000 (tiny though it may be at the
moment).

------
mynegation
So it is a column that is a collection of short opinions on various matters. I
presume it was submitted because of the "Vest" section, YC funded startup that
sells option strategies to the investors.

Yes, the point that big finance has the economy of scale in option trading is
true. But only if you are able to fit into the scale of their operations. Big
finance reaction to the retail investors is very well summarized in the GS
Elevator tweet (parody account, no relation to the GS, the investment bank):
[https://twitter.com/gselevator/status/189798000078499841](https://twitter.com/gselevator/status/189798000078499841)
("Oddlot" means a position of less than 100 stocks). So there _might_ be some
value to be created in the retail investor niche.

Edit: according to another comment, Vest does not sell odllots either, and
their products seems to be seriously overpriced, so I am not sure what their
value prop is exactly.

~~~
jackgavigan
_> I presume it was submitted because of the "Vest" section..._

That's correct. I thought Matt Levine's reaction was interesting.

