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.