Betting on a Crash With Options

but however i am trying, i cannot find such option that would possibly give me 1 to 100 or similar payout. you say 10000%. can you give an exemple of specific option that could go up that much, if for ex. we reach 1000 on SPX before jan2017 ? or any other exemple. thank you
 
longthewings said:
The back-of-the-envelope way to do this is to make a couple of simple assumptions. Define the "crash" -- say, 50%. Define the tenor -- say, over 6 months. Next, think about what vol would carry you there over that time. Probably around 75-80%, which I believe is in-line with where VIX topped out during Lehman.

Price a few different expirations -- 6 months, 9 months, a year, etc. Pick a deep OTM strike -- ideally one which maximizes your vega convexity and gives you the most bang for your buck. For a six month SPX option this is likely around 950 priced today with 80% vol.

Calculate the fair values for the options around 6 months from now, and compute your return %'s off the current market value of the options you selected.

These are lottery tickets. No one can predict a crash, and I wouldn't dump a lot of money into these. But owning a couple might not a bad idea. I would think you could easily find some options that'd give you 10,000%+ IF your crash scenario played out.

I'm sure others could give you a more technical, superior method; but this is my way of thinking from 50,000 feet.
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Nice post. I see these plays in many different instruments and markets. Spreads with lottery like payoffs done in huge size. It is definitely how smart money plays. Obviously, they don't bet the farm. These bets are tactical overlays within an existing strategy where they "stay the course".

Specifically for the OP, experiment with a far otm vol spread with modest spreads requiring little capital. It goes without saying, this type of play requires a good understanding of how the skew can evolve.
 
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instead of buying puts you COULD sell calls/call credit spreads to play a bear market:

http://finance.yahoo.com/echarts?s=SPY+Interactive#{"range":"5y","allowChartStacking":true}

SPY
Sell Jan '17 220 call and buy Jan'17 225 call for a net credit of $109

Price............. Profit / Loss......... ROM %
143.94............. 109.00.................. 21.80%
170.29............. 109.00.................. 21.80%
198.03............. 109.00.................. 21.80%
220.00............. 109.00.................. 21.80%
221.09................ 0.00..................... 0.00%
225.00........... (391.00)................. -78.20%
225.77........... (391.00)................. -78.20%
253.51........... (391.00)................. -78.20%
281.25........... (391.00)................. -78.20%

Here's a basic question: What is the macro-economic rationale to expect a bear market??

MW-CD217_bear_2_20140513125054_MG.jpg
 
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i dont have any advanced understanding of options, but still i cant get my head around the statement that there are OTM puts that can grow 10.000% in value in 6 months from now if we crash 50%.

can anyone of you guys who understand it well enough,
give a CONCRETE SPECIFIC exemple of a put that grows so much in value if we lets say fall 50% before jan2017 ? that would be cca 1060 on SPX.

??? i can find such that it shows me would be 1 to10 or 1 to 50 at most.
but 1 to 100 ?!?

i wanna know that this exists. please enligten me with a single specific exemple.

thank you.
 
thigle said:
i dont have any advanced understanding of options, but still i cant get my head around the statement that there are OTM puts that can grow 10.000% in value in 6 months from now if we crash 50%.

can anyone of you guys who understand it well enough,
give a CONCRETE SPECIFIC exemple of a put that grows so much in value if we lets say fall 50% before jan2017 ? that would be cca 1060 on SPX.

??? i can find such that it shows me would be 1 to10 or 1 to 50 at most.
but 1 to 100 ?!?

i wanna know that this exists. please enligten me with a single specific exemple.

thank you.
More...

Yes, using Black-Scholes (flat-vol), it will come out to around ~3500% or so on average. You have to account for the skew as well which should add more to the return.
 
This is an election year. The market goes up 80% of the time in election years. I wouldn't count
on a crash this year, people. Just google: "election year stock market."
 
big crashes happened in last 2 years of 2 term presidents.
80% doesnt matter.
spx and dow had worst opening in decades and ever !
for 140years, sp500 NEVER ended in red in a year with 5 in it.
this year it did.
commodities index at 48years lows,
baltic dry at historic lows.
etc etc etc.
 
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