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JP Morgan/Jamie Dimon is worried:

It seems that JP Morgan is suggesting there's been a dangerous tailwind behind recent market price movement due to short-sellers covering shorts
https://markets.businessinsider.com/news/stocks/st...

The embedded chart shows the percentage of shorts (as fraction of shares outstanding) over time.
- From 2018-2023 or so short interest fluctuated around 15% as percentage of shares outstanding in SPY, and about 12% as percentage of shares in QQQ.
- From 2023 to now short interest has dropped to roughly 8% for SPY and 7% for QQQ.

SPY price has risen 46%, QQQ price has risen 88% percent, over 2023-present (non-annualized). Do you think value has risen that much?

In a different post, Jim noted that VIX1Y (the one year VIX, as opposed to the familiar one month VIX) is at quite low levels and so long-term options (depending on the underlying) should be relatively cheap. He suggested perhaps buying long-term quite OTM (hence cheap) puts on a short-list of highly over-valued firms.
Any suggestions for such firms?

Failing that, perhaps buying some long-term far OTM puts on QQQ would be an easy way to approximate that idea.
Hmmm... or perhaps buy puts on just the top five highest flyers in terms of price and P/E. Selling the appreciated puts would generate cash in a crisis which could be deployed to buy e.g. BRK, that has probably fallen with the market ("in a crash, correlations tend to 1.0").

Jamie Dimon has also recently been expressing concern about the fragility of markets due to (1) financial issues (e.g. interest rates perhaps higher for longer than anticipated) and (2) geopolitical issues (the usual list). Sorry, no link, just google him on youtube. When he gets concerned, I get concerned.

He suggested perhaps buying long-term quite OTM (hence cheap) puts on a short-list of highly over-valued firms.
Any suggestions for such firms?

Always a tough call, but this list might offer some inspirations. I'm sure there is some fluffy hype in there somewhere.
https://greenstocknews.com/stocks/artificial-intel...

Note, when buying put options for profit, often you will want a combination.
Put options are expensive. But you rarely expect your target to drop 100%, so you might want to buy something that pays off with a drop to the interval of (say) -10% to -40%, maybe -50%.
That can be done by buying a put option that starts profiting when you want it to, but selling another put option (same ticker, same expiry) at a much lower strike.
This can notably reduce the up-front cash cost of opening the position, while still accomplishing the bulk of your investment goal.
Writing the put is not an exposure risk, PROVIDED you don't close the higher strike one first. If the firm goes bust, the one you've written will lose a whole lot, but the one you bought will make more.

Jim

A couple of potential high fliers due for a fall?

- Micron: ticker mu: price rose from 65 to 139 in past year, P/E negative, operating income negative with bumpy history
Possible positions:
roughly 30% OTM June 20 2025 put strike 100 bid 7.20 ask 7.75 mid 7.475, so one contract 747.50
roughly 50% June 20 2025 put strike 70 bid 1.30 ask 2.35 mid 1.825, so one contract 182.5

If did put spread then: 747.50-182.5=565, and 565/747.50= 0.75 so roughly a 25% reduction in cost with spread

- Taiwan Semiconductor. ticker tsm: price rose from 100 to 167 in past year, P/E 32, operating income now negative with bumpy history, sold by Buffett in 2023
Possible positions:
roughly 30% OTM June 20 2025 put strike 115 bid ask 4.60 4.90 mid 4.75 so one contract about $475
roughly 50% OTM June 20 2025 put strike 85 bid 1.25 ask 3.00 mid 2.125 so one contract about $212
If did put spread then: 475-212=263, and 263/475= 0.55, or roughly a 45% reduction in cost with spread

Potential issue with put spreads:
Puts (and calls) are quite senstive to price and also quite sensitive to volatility. Ideally one wants to take advantage of both.
A put spread buys one put option and sells another to offset the cost of the long put.
But this also offsets the effect of a spike in volatility.
A put spread has low 'vega', i.e. a spread is not very sensitive to changes in volatility whereas a single put is much more sensitive to changes in volatility
https://www.fidelity.com/learning-center/investmen...
I actually don't like 'the Greeks' because people so often misinterpret them, but people quote them, so I threw in the reference.

More practically, a while ago I scanned through some historical options data for the S&P500, looking for puts that had a huge increase in value, just out of curiousity. I found one that increased some ridiculous amount at some point during the Great Recession (like 10x-50x the initial ask, sorry I forget the exact factor, but it was astonishing). This was a fairly reasonable put too, it was maybe a 30-40% OTM or so 'disaster' put with some reasonable lifetime like nine months or something. Anyway, it spiked to absolutely huge multiples of the initial ask.
This spike in put value was due to a drop in price and a spike in volatility.
A single put is both a price play and a volatility play, while a put spread is more of a price play.

A single put is both a price play and a volatility play, while a put spread is more of a price play.

Yeah, all that Greek stuff is hard.

Despite making my living primarily from options of one kind or another, I simplify things a whole lot: With very few exceptions I just assume all my positions are held to expiry, and ignore the interim. The time value is extremely easy to estimate in that situation!

If I *observe* time value moving in my favour (or against) for an existing position I'll occasional do an opportunistic trade, but I don't think about that when deciding on opening a position.

One of the few exceptions is when I buy "disaster puts". Time value spikes during disasters, and that's when you want to sell them, so having puts with lots of time value in them (long dated) is sometimes good. Disaster puts generally lose money, so you want to have a bit of a "time value" tailwind to reduce the pain.

Jim

I think we're in agreement. The two I listed I viewed as opportunistic trades, stuff that might take a hard fall within the next 365 days or so if there's market turmoil and flight to quality, but I wasn't planning to hold them to expiration and have my only opportunity be the price at the end. If one or both of those puts are ten baggers in the interim, due to price decline and vol spike, then I'll take it! Of course, you never know ahead if it'd be a twenty bagger, so I'd just sell when it seems "good enough for me" and deploy the winnings in bargain quality stuff.
For that scenario, I wouldn't do the spread even though it's cheaper.

Huge Jamie Dimon fan. One of the great CEOs of all time. His leadership during the Financial Crisis, especially was fantastic--as Buffett pointed pout.

That said--when was the last time Jamie Dimon was NOT "concerned"??? He's in the "concerned business". Thats what he's paid to do. He does it well. Great financial industry managers spend every day in the concerned business.

He worries about inflation, disinflation, stagflation, global geopolitics, terrorism, productivity. And I assure you he'll worry about that next year too.

If you sold stocks because of Jamie Dimon's "concerns" you've missed one of the great rallies of all time. And each time after Jamie makes a statement that draws market attention-- days later he always seems to say something to the effect: "what I said was taken a bit of context in in no means a call to sell stocks". Problem is--that reaction gets zero publicity.

And when "concern" morphs into "consensus", like when you hear "there's never been MORE uncertainty" repeatedly on CNBC--Howard Marks explains that's the healthiest sentiment environment possible with respect to valuations. Cycles matter and that's NOT what occurs at tops of cycles. Common sense.

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