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Comment by rafaelmn | Hacker News Reader

With the difference that you could get wiped out on the short ? Edit: I was wrong, if ETF has same amount of Tesla it should even out.

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You can short without tail risk, e.g. buying puts.

A put is not a short replacement.

Buying puts is more about longing volatility.

You can simulate a short with multiple options.

https://www.optionseducation.org/strategies/all-strategies/s...

This is not quite all the way there, but close enough. Basically, you do something analogous to 1 = 1/2 + 1/4 + 1/8 + ...

In theory, yes. But when you include hedging costs and taxes, the link becomes less direct. The cleanest way to get long volatility is by purchasing ATM straddles.

https://www.investopedia.com/terms/s/straddle.asp

No. A long strangle is a way to long volatility.

With a put, you primarily pay for directionality with hedged upside risk: you don't lose your house if the stock moons. While it's true volatility is a component, that's a side effect of the hedging since your counter party takes on volatility risk.

How would that work? You are simultaneously long by the same amount. The ETF would go up by whatever amount you are short.

yea literally my exact thought.

Wish there was some better financial instrument for such purpose instead of shorting.

But you won't - you "own" an equal number of shares of TSLA indirectly through the index fund. If TSLA goes up, that part of your ETF has gone up. You're just being simultaneously long and short the same stock. The only difference between that and "not owning TSLA" is that you're paying a bit to borrow the shares -- about 0.41% annually, right now.

Options.

well not if the short matches the amount you hold in tesla stock through the ETF right?

You'd want to have cash on hand to cover your short position or you risk having to sell (potentially a lot of) your ETF to cover, which loses out on future whole-market upside. Still seems risky to me.

Or am I thinking about it wrong?

I definitely don't know much about finance, but a short is essentially being obliged to sell a position at a future date, right? You match your short position against the fraction of your ETF which is in TSLA, such that you are obliged to sell in the future exactly as many TSLA shares as you indirectly own through the ETF. This way you do not need cash on hand, because you can sell a portion of your ETF to pay off the short.

Theoretically it's not risky because in the scenario that the short becomes expensive, TSLA has gone up the and in turn TSLA has made your ETF appreciate the same amount that you owe due to the short, and vice versa if it goes down.

> TSLA has made your ETF appreciate the same amount

That's no guarantee. I mean, yes, the ETF price reflects its proportion of Tesla stock, but the market as a whole might have declined - even in bear markets some individual stocks appreciate.

Investing in ETFs is a long-term, counter-cyclical strategy. Dips are when you want to buy ETFs, not when you want to be forced to sell them because you took a short that failed to pay off. If you have to do that then you're not only selling the Tesla within your ETF, but also the future upside of all the other stocks in the fund. Isn't that hugely inefficient?

But, I'm not a particularly sophisticated investor, either (thus: ETFs for me), so my intuition may be wrong. Does anyone have some maths to bring to bear on this?

Yeah of course you can't escape the general market risk, i'm only talking about a strategy to avoid net exposure to risk specific to the TSLA stock.

OK. Other people (probably not you) in this thread were talking about this strategy like it was basically risk-free. Compared to a naked short it's, um, obviously a better idea, but I still think others were over-selling it by not mentioning all of the downside risk.

Oh yeah, I don't think I would suggest actually implementing this because it's just a lot of costs and fees to emulate what otherwise would be an index without the stock

Well, the people advocating it are bearish on Tesla and trying to win a bet on that, while "hedging" it with their ETF portfolio. I mean, on the fundamentals I'm bearish on Tesla, too, but there's a not-inconsiderable chance that any day now Musk announces an eleventy-billion dollar contract with the US government, so no way I'm taking that bet. Anyway, I'm not a gambler, so all my investments are super boring.

True didn't consider that.

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