Read Millionaire Fastlane
I've Read UNSCRIPTED
- Jul 23, 2007
Sorry but I hate to say this, but this is probably the WORST way to play a big market drop. (The 2900 SPX Put)These are the speculative puts I currently own.
I will post this so it gives you a chance to re-strategize your bet, and teach other folks here some things on selling (or buying) options. I will also post this in my MEGA option thread on the INSIDE because it is a HUGE lesson.
Buy purchasing an ITM put option, you will be negating the real speculative value of buying put options: NOT the price decline, but the VOLATILITY EXPLOSION.
While your put will enjoy a nice price increase from the SPX decline, it will NOT enjoy a huge VOL expansion.
To demonstrate exactly what I'm talking about in REALITY, not theory, lets assume you made a similar bet on January 26th, 2018 -- a few days RIGHT BEFORE the huge February correction.
THESE ARE ACTUAL REAL HISTORIC NUMBERS BASED ON THOSE DAYS
(Using ThinkorSwim ThinkBack Function)
You buy the 2880 SPX PUT with 62 DTE
========== Total Cost: $5,065 (50.65 X 100)
The right bet is buying 10, 2555 SPX PUTS with 62 DTE
========== Total Cost: $5,050 (5.05 X 10 X 10)
So now you have SPENT the same amount of money on the SAME BET.
Here is how it plays out...
On February 8th, 2018 in the midst of the market correction, your 2880 SPX PUT would be worth...
Your 50.65 put is now with 288.65 or $28,865
(Total gain: 28,865 - 5065)
TOTAL GAIN: $23,800 - 471% !!
Had you bought 10 of the 2555 SPX Puts (Remember, same total cost!)
Your puts would be worth $73.65 X 10 ... in other words, $73,650 (73.65 x 10 x 100)
(Total Gain: 73650-5050)
TOTAL GAIN: $68,600 - 1,358% !!
By playing (buying!) the WRONG option(s), you will cost yourself $44,800 in gains and nearly two-thirds of your (%) gain that should rightfully be yours!
---> SAME BET (The market is going down BIGLY!)
---> SAME COST (I'll risk $5K of FU Money!)
---> SAME OUTCOME (Holy shit, I was right, the market dropped big!)
---> NOT A DIFFERENT RESULT.
This is the power of volatility expansion if you are on the right side of the bet.
Buy the wrong option, and you neuter it.
Additionally, by buying multiple options, you can scale out of your position as the market drops.
With ONE option, you're either ALL IN, OR ALL OUT.
On February 8th, you can sell a portion of your stake to LOCK in GAINS and then ride the rest.
For instance, if you just sold ONE option you'd guarantee yourself a 45% return, even if the other 9 options expired worthless! Cost basis: $5,050, One option: $7,365, Gain 46% ... and then you have 9 options left...
OR sell HALF and let the other HALF ride...
Or sell 8 of the 10 and let the other 2 ride...
With ONE option, you've pretty much castrated your ability to really make big money from the bet. The expected value (EV) on your bet is significantly NEGATIVE, whereas the multiple option bet it will likely be positive.
I hope this information helps you!