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Anti-ultrashort rant update



April 18, 2008 – Comments (5) | RELATED TICKERS: SDS

I ranted in an article here against buying ultrashort ETF's to play the coming economic hardship, stating that there will be severe inflation accompanying that economic stress, and demonstrating how real returns can be severely negative for both the S&P 500 and the ultrashorts of the S&P 500 simultaneously.

However, I thought of a caveat: you can buy ultrashort ETF's and lucratively write covered calls on 60-70% of them. (Yes, I just pulled those numbers out of my wazoo.) This should provide good income to offset inflation, and still allow you to profit in the event of a notional market crash. However, if inflation is around 20-30% and it drives market prices upward at about 10-15%, you will be in a world of hurt. Still, I don't see how, in an inflationary environment such as this, it would be better to buy SDS without writing calls than to buy it and write calls.

5 Comments – Post Your Own

#1) On April 19, 2008 at 11:00 AM, abitare (30.20) wrote:

Good posts. I still like SKF at or below 100ish. To me the financials have a systemic problem that cannot be cured solely by FED action. But I never anticipated the hyper activity of the FED in trying to prop up the bubble they and the financial companies created.

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#2) On April 19, 2008 at 11:49 AM, leohaas (29.78) wrote:

"However, if inflation is around 20-30%..."

And if my sister had a Weenie, she'd be my brother.

Stop making these unrealistic assumptions. Sure, you can come up with some commodities that have risen at that clip or even more, but my purchasing power definitely has not declined by that much over the past year.

If the scenario you describe were to come true, you are best off with a remote ranch, stacked with food, gold, guns, and plenty of ammo. Anything else would be useless...

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#3) On April 20, 2008 at 10:52 PM, FleaBagger (27.47) wrote:

leo -

"Stop making these unrealistic assumptions.

Stop telling other people what to write and what not to write. Just kidding, but seriously, read my post again and look at the context.  

Don't call the 20-30% inflation scenario an assumption, unless you mean the tertiary definition of "supposition." I did not at all state that I think we have or are likely to have >20% inflation. It is possible. All things are possible, and this particular possibility is far less remote than I believe you are implying. Furthermore, I was coming up with a hard and fast worst-case scenario to try to slam my imaginary SDS/covered calls portfolio. So while it's kind of flattering that you read my blog so carefully and seriously, you definitely had no reason to take what I wrote the way you did.

Who's hyperbolic now? Even 30% inflation is no reason to run for the hills. Rioting in a time of rampant inflation is more closely tied to a breakdown in law and order that in many cases past has accompanied the inflation because the gov't that is bad at the one is bad at the other. It does not necessarily follow, and even the worst rioting in 30% inflation scenarios past has rarely risen to eschatological levels.

Finally, if your sister had surgery to make her look like a man, and kept her female reproductive organs, and got pregnant, she wouldn't be the first. Not that that has anything to do with anything - but you brought it up.

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#4) On April 21, 2008 at 11:51 PM, madcowmonkey (< 20) wrote:

leo- I thought that was your brother:) 20-30 percent inflation. Wow, shoot me now.

This SKF and SDS debate is frantically eating at my shins. How many people were down on SKF? These financial companies should be filing for bankruptcy with these reports and sorry to say, they are fudging.

I hope your wazoo is alright. That was a pretty big set of numbers you pulled out. Just as of note, I watched the news (unfortanetly) today and somebody said that it was a good time to start buying the homes here in So. Cal:) 

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#5) On April 22, 2008 at 12:44 PM, FleaBagger (27.47) wrote:

Put me down for a 105% subprime jumbo mortgage and I'll buy one.

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