I want to buy a stock Put like 4 months out - as that would be the earliest I could see my prediction of say a 15-25% decline. What is the best strategy to do this for maximum return, like at least 10-20x my money? I'm willing to bet maybe 5% of my equity or more on this.
Best Put Strategy?
- Thread starter povstanets
- Start date
Put all your assets into ATM puts. TP when your account has grown by 50%, SL when you loose 5% of the account value. There's your 10:1 win/loss ratio.
However, the current skew might favor a deep otm strategy. Say a 10 delta which has an approximate probability of 10% to be ATM at expiration. If you calculate the forward value of that option ATM ( at 2 weeks prior to exp or so), you may have a better idea how to size to trade, and determine exit time and the exit value. It's going to be tough to guesstimate the volatility level at the price though, but it will surely be very high.
However, the current skew might favor a deep otm strategy. Say a 10 delta which has an approximate probability of 10% to be ATM at expiration. If you calculate the forward value of that option ATM ( at 2 weeks prior to exp or so), you may have a better idea how to size to trade, and determine exit time and the exit value. It's going to be tough to guesstimate the volatility level at the price though, but it will surely be very high.
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The stock is roughly $100 right now and 3 months out 100 contracts are .15 cents each at my predicted price - so $15, At the money would cost me $2.50x100 contracts, how could I make more with ATM? Or do you just think thats a safer play? (Btw, sorry I'm a complete option noob here)
ATM guarantees there is going to be a market bid/ask for you if you want to exit early.
OTM time decay is relatively faster in the outside months. The chart is a flipped version of ATM time decay. If you are looking at very deep OTM, then you are making an all or nothing bet. There won't be a liquid market.
From a theoretical point of view, you can structure it ATM or OTM..anyway you want with just Skew/Volatility predictions to consider.
BTW, why are you so sure the stock is going tank. Is it common knowledge thats already price(or overpriced) into the stocks IV?
OTM time decay is relatively faster in the outside months. The chart is a flipped version of ATM time decay. If you are looking at very deep OTM, then you are making an all or nothing bet. There won't be a liquid market.
From a theoretical point of view, you can structure it ATM or OTM..anyway you want with just Skew/Volatility predictions to consider.
BTW, why are you so sure the stock is going tank. Is it common knowledge thats already price(or overpriced) into the stocks IV?
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Thanks, for these guidelines, it helps point me in the right direction. Since ATM retains some value, does anyone run a strategy like purchasing 1 ATM position for say 4 consecutive months and constantly roll it over each month selling the nearest one for a loss and buying a new one far out until they are proven right?
I'm not sure of exact months, thats why I want something out a ways; I'm just making a macroeconomic bet, there are a whole host of things you could buy Puts on.
I'm not sure of exact months, thats why I want something out a ways; I'm just making a macroeconomic bet, there are a whole host of things you could buy Puts on.
I would suggest using options in the 45-60 day window. A trader reminded me in a previous thread how the 45-60 day options have move more for the time value that you pay. But if your doing buku contracts, then I guess a longer timframe, less rolls might be better.
Sure, that's how people insure their portfolio. You may want to track the volatility curve in various monthly expirations on a spreadsheet. To see relative pricing and time your rolls to your advantage.
If he was so sure he wouldn't risk 5% but go all in.
5% in naked options on a single name is a lot to me. I don't even agree with his bet even though I don't know what it is.
If he was so sure he wouldn't risk 5% but go all in.
The rest of my equity will be shorting the same position.
Okay, thanks for this - I actually need to do something like this to hedge a position I don't want to sell, so it may work well for that too. The main Put I think I may focus more on one OTM play as just a bet, I just want to try something that will pay very well.