Socialism and buying puts

While I espouse socialism, I’ve also been buying puts on homebuilder stocks. Contradiction? Maybe, but we do live in a capitalist world.

Puts are stock options. They give the buyer the right but not the obligation to sell 100 shares of the underlying stock at a set price. If the stock price drops, the value of the put increases. The opposite of a put is a call, which gives the right to buy 100 shares at a set price. If the stock goes up, the value of the call increases. Hardly anyone ever actually buys or sells the underlying, instead they just sell the option which hopefully has increased in value.

Those new to options generally get confused by the above, which is more than understandable. What comes next usually confuses even more. You can sell options without owning them, hoping the price drops so you can buy them back later at a lower price and pocket the difference. (You don’t actually own them when you buy them back, this just zeros out the transaction.) All this can get quite rarefied, as in buying options on futures on an index, as can be done with the S&P 500 index.

Homebuilder stocks are in a death spiral now, and this will be a continuing trend for months and months to come. Thus, buying puts on them can be profitable. (Note: options are tricky little beasts, do not attempt it unless a) you know what you’re doing and b) are prepared to lose the entire investment. The value of an option can double in a few days, and can also go to nearly zero.)

Would a socialist world have a stock market? Dunno. Would this be a good or bad thing? Clearly, our financial markets are often out of control, as the subprime debacle shows. Plus, US financial markets demand that companies produce better earnings every quarter and this puts an undue emphasis on short-term profit at the expense of the long-term good.

Companies issue stock, take the money and do something with it, yet we saw how the IPO process was abused during the dot com boom, with lots of worthless companies being pushed on the market. The original investors and the investment banks, those selling during the IPO, got rich. Those buying were generally considerably less fortunate. A tiny few got even wealthier at the expense of the rest of us.

China, while at least nominally socialist, has a stock market. So does communist Vietnam. I wonder, are their markets more managed, so as to prevent obvious abuse and exploitation? Probably not. And if they were strictly managed that does leave the possibility that those doing the managing could be profiting on the side.

Capitalism is organic, it just grows and sprouts. Socialism has a managed economy. What we need, and what the various planetary economies are heading towards, are localized hybrid mixes of both.

4 Responses to Socialism and buying puts

  1. Sue Mon, Jul 30, 2007 at 12:21 am #

    Good luck with that. People just plain suck and I don’t think that’s going to change anytime soon. But yeah … try.

  2. DJ Mon, Jul 30, 2007 at 10:16 am #

    “Contradiction? Maybe, but we do live in a capitalist world.”

    It’s only a contradition if you believe in either-or absolutism. As you point out, most surviving socialist states include some elements of capitalism. Those that don’t (like Cuba) still have it in the form of a thriving black market.

    OTOH, most major capitalist states include some elements of socialism– even (gasp) the good ole U S of A. So the question is not whether the two ought to be mixed, but rather what is the perfect balance. I think even Adam Smith would agree that the U.S. is not fulfilling its obligation to provide what the market cannot. Yes, this traditional conservative thinks the U.S. is not socialist enough.

  3. Bob Morris Mon, Jul 30, 2007 at 11:28 am #

    There probably will be no one-size-fits-all mix of capitalism and socialism, but rather dozens of variations of the theme.

    The US is still the least socialist of most any country I can think of, with probably the most predatory form of capitalism too.

  4. DJ Mon, Jul 30, 2007 at 11:56 am #

    You know how I hate best/worst pronouncements… Is the U.S. the least socialist country? I doubt it. Somalia and Iraq spring to kind, of course, but so does Thailand– a beautiful country with a wonderful culture, but not much in the way of social services. Where does Russia stand with socialism these days as its extreme capitalism increasingly pervades society? And of course there are a plethora of African nations that provide little in the way of social services (because they can’t afford to).

    You could probably say that the U.S. is the least socialist of the major industrial nations… but as we seem to be trying hard to bring our country’s standards into the Third World, I wonder whether that still applies. (That’s not a comment on immigation, BTW, but on the decreasing level of interest in infrastructire and social wellbeing.)