I'm re-running some of the Fed's stress tests and, somehow, still find myself flabbergasted that DB is at the top of my risk list. Despite only having $12bn of exposure, if they see a 60% loss on that risk alone (assuming 60% recovery and 1.5x leverage), they breach their 4.5% capital requirement. That's the lowest threshold I'm finding across all of the banks the Fed stress tests.
Now 50% loss means wipe out. But given the size of the portfolio, there is also the concentration risk. A single private-credit firm going bust shouldn't take out a bank. But that seems–seems!–to be what I'm seeing.
It's never the time to short a company, even a really bad one. You have only 100% upside, infinite downside, and you have to time it perfectly. A short can be a part of a combination strategy where you go long on one company and short on a related one, but you still have to be really careful.
If DB stock increases 50% before it crashes, would you be forced to sell at the top and lose all your money?
This is sensible advice for most people. I see some thoughtful quibbles but I wish you weren't down voted. If you are a normal retail investor, please listen to pocksuppet.
pocksuppet’s advice is I think more of a reaction to a specific way that you could take a short position, and in 2026 I think you want to assume that people who know what “short” means, also know what options are.
The advice is good in a kind of stopped clock sense.
I'm old, so I am a stopped clock. However, I have invested my whole life including good times and bad. I believe that for a retail trader -- someone who doesn't get paid to trade other people's money-- options are bad. OK yes there are special cases like when your job requires you to hold a lot of one stock etc. I'm not going to make the case why here I am sure it has been argued to death.
I do remember smart friends getting interested in options at different times in the last thirty years because they make higher returns. Then they have a period where make lower returns, or have a real problem. I don't think its worth the attention and the trading cost for most people, even people who understand what a short is. You can't argue with a person who has been doing really well with them for five years but it always seems like people stop.
My take on why options are bad—options are bad most people because most people don’t get use from hedging, don’t have enough information about the timeline of price movements, and all you’re left with is a form of gambling. A form of gambling that’s pervasive enough to worry me. People on Reddit trying to get rich with SPY options (how could you possibly know where SPY is moving?)
Short positions are also bad, because there’s an ongoing cost to carrying a short position, and that cost is likely to cannibalize your expected gains.
Lots of good reasons around to avoid short positions and options like they’re the plague. I don’t like the “unlimited downside” reason because it’s solvable.
To people who are making lots of money in stocks or options… my question is always, “do you have high returns, or do you just have high volatility?” Because it’s easy to look at high short-term returns and believe that you’ve somehow beaten the market, when you’re really just holding a high volatility position that got lucky.
> I do remember smart friends getting interested in options at different times in the last thirty years because they make higher returns. Then they have a period where make lower returns, or have a real problem.
Volatility. Never trade options if you don’t understand volatility.
“Shorting” a company does not just mean short selling stock. Instead, it means having a short position, which you can use without unlimited downside.
The easy way is to buy puts. Maybe your next question is, “who is selling puts?” And that’s a good question, but you don’t really care, because you can buy your puts on the open market and when you do that, you get protection from credit risk.
There are other reasons why this isn’t a good idea but “unlimited downside” is not one of them.
> “Shorting” a company does not just mean short selling stock. Instead, it means having a short position, which you can use without unlimited downside.
If you are an equity index holder anyway, simply by not holding any exposure in an otherwise "market" portfolio is a "short" relative to benchmark.
ie if I "buy" the SP500 constituents according to weight but with TSLA zero'd out my portfolio is essentially the same as long SP500 and short weigtht*TSLA.
Normally you buy into something like SP500 via something like an ETF, something with a very low fee because it’s managed entirely automatically via simple algorithms.
How can you invest in SP500 minus TSLA without racking up exorbitant fees?
Unless such a fund already exists, you’d be managing it yourself and pretty much wiping out any gains any time you rebalanced.
> How can you invest in SP500 minus TSLA without racking up exorbitant fees?
Various options…
1. Direct indexing (requires minimum amount of assets),
2. Certain actively-managed ETFs like GGRW, which is not exactly SP500 minus TSLA but it’s not too far off
3. Buying passively-managed ETFs in sectors that don’t include TSLA,
4. TSLQ, maybe. You get fees and other problems. I wouldn’t.
Direct indexing costs more than ETFs in terms of fees, but there’s apparently some kind of tax loss harvesting that you can do with direct indexing to offset the fees, and some people say you can come out ahead. I don’t understand how tax loss harvesting works at a satisfactory level (I’ve read articles and watched videos, but I think I would need to take an accounting class and really sit down with a spreadsheet before I could say that I understand how direct indexing and tax loss harvesting work together.)
And puts are highly manipulated by MMs so you have to really study the chain and how it behaves before you have a chance to buy the contracts at a fair price. MMs will flood the market with contracts and devalue yours even when the price is moving in your direction. I highly suggest people think twice about trading options, they are best used as hedges for large positions during particularly vulnerable periods.
I’m not convinced. If you think you know what the fair price is for a put, then you can bid that price. If you don’t think you know what the fair price is, then you shouldn’t be trading options.
There are reasons for not trading options, but the main reason is “you know less about price movement than you think you do”.
Realistically, if you don't have the volume to be a market maker, there's no point bidding anything except the current market price. Either the price is higher than your bid, and your order won't fill (so why place it?) or the price is lower than your bid, and you should expect the market knows something you don't.
> Either the price is higher than your bid, and your order won't fill (so why place it?) or the price is lower than your bid, and you should expect the market knows something you don't.
There is no risk-free way to trade. You can place a market order and guarantee execution, bearing the risk that you get a bad price. You can place a limit order, and guarantee price, bearing the risk that your trade doesn’t execute.
It sounds like you’re starting with the assumption that you don’t know whether the options are undervalued or overvalued, and if you start with that assumption, yes, the correct answer is don’t buy or sell the option (barring some other reason to buy or sell). Duh. But the reason the market “knows something you don’t” is because it’s full of people doing research. Sometimes, the person doing the research is you, and you have an idea of where the price will go. That’s what an edge is. When you have an edge, you can make money, but maybe not very much and not very reliably.
Where it gets ridiculous is when people speculate with SPY options or dumb shit like that. The reason why speculating with SPY is so ridiculous is because it’s just so unlikely that you could get an edge with SPY. But in general? Yes, it’s possible to get an edge.
Trades always execute at exactly the market price. A limit order says that if the market price reaches your limit price, execute the trade. At that moment, your limit price will equal the market price.
That is technically correct but uninformative. If there’s a point you’re making, I can’t figure it out.
You earlier said that there’s no point in bidding anything but “current market price”, and that’s what I was responding to. Limit orders can execute at current market price but they can also execute at some future market price. It’s ok to place limit orders, they just have different risks from market orders.
It would be more helpful to say don't buy options once the trade is obvious. As soon as something has hit the FOMO phase and IV skyrockets and all strikes cost the same, that's a sign you're too late and might want to bet against your thesis or use a different instrument. The financial shoggoths do a reasonably good job ensuring there's no free money. However they're obligated to trade regardless of conditions and sometimes that's their weakness.
Infinite downside is theoretical. The bigger problem that I learned a long time ago is that the leadership of every company is fighting against the stock going down. So if you're long a company then your interests are aligned. If you're short you really need to have conviction that it's a winning bet because everything else is fighting you. Also, it's a short term play - the short eventually needs to be unwound. So you're not just making a bet you're making one that's losing you money over time.
What you are saying suggests that there's a single number (that can be positive or negative) that characterises your net short or long position.
That's silly.
You can build pretty much any kind of shareprice-to-payoff function with enough options and other instruments. And that's one dimension (a line) more than just a single number. You can get arbitrarily more complicated, if you want to.
If you think they are going belly up this year it is far cheaper and safer to buy a put. You risk losing the money you spend for it up front but your losses are capped. Right now the 25 strike for a DB Jan 15 2027 put is 2.50/2.85 bid/ask. DB is sitting at $29.44 as of yesterday's close. That's $285 bucks up front that gets into the money if DB falls beneath 22.15 by Jan 15th 2027. But if it moves down sharply in the near future you could just turn around and sell that put for a profit long before expiration.
This is not financial advice, it is gambling advice.
Now 50% loss means wipe out. But given the size of the portfolio, there is also the concentration risk. A single private-credit firm going bust shouldn't take out a bank. But that seems–seems!–to be what I'm seeing.