Using Optionality to Hedge and Secure My Girlfriend's Severance

I was sitting on the couch reading a new book.

It was 5 p.m.

I could hear high-heels clacking off the ground from outside getting closer.

The door swings open.

“Mortgage rates are soaring,” she said.

My girlfriend works as a mortgage underwriter for a large bank. Her job is to review an individual’s information and approve or decline them for a new home loan or refinancing.

Being contrarians and believing since 2010 the US has been in a debt and refinance bubble – we knew this was coming.

It’s always been a question of when – not if.

“I know – I saw on Bloomberg that refinancing’s are at a near decade low,” I said.

“Not just that – corporate just fired 150 employees today,” she said.

We sat on the couch for a while longer and talked about what was going on.

Thankfully we hedged ourselves in a unique way months earlier. . .

Long time readers know how important our investing and life rules are, but especially these two:

• Don’t put yourself in a fragile position – when just a small spurt of volatility can ruin everything.
• Set yourself up to gain from disorder – make the volatility work for you, not against you.

My girlfriend and I know that her line of work is cyclical.

That’s because during years of low interest rates, mortgage lenders do very well.

But when rates start rising, the housing market busts and the lenders suffer. . .

People that are locked into 30-year mortgages at 3.5% won’t refinance at 5%, and the decline in new mortgages means lower home sales – which will push real estate prices down.

And since 2017 as rates started climbing, we knew that the housing sector was going to weaken.

“An increase in U.S. mortgage interest rates is throwing ice water on the great American refi — and choking off business for lenders. Refinancings as a share of home loan applications fell to 41.8 percent last week. With a couple of exceptions, that’s the lowest level since the financial crisis in 2008, according to data from the Mortgage Bankers Association.” – Bloomberg (March 1, 2018).

That’s when I had the idea to hedge ourselves in this creative way.

Let me explain. . .

The chances are high that another 2008-like Recession will happen eventually.

Which means there’s a huge possibility that my girlfriend might get laid off when that happens. . .

If that situation is likely – why not set ourselves up to get an ‘indirect’ severance from the company?

That’s why in December 2017 I decided to buy her 1-Year, Out-of-the-Money, Put Options on these two housing stocks. . .

Continue reading here: All Eyes On Gold – But Its Platinum That Will Soar

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