Buy QQQQ puts

T

tonyzhou

Hi,

I have some questions about QQQQ option.

Basically, the purpose I want to buy some QQQQ puts is to prevent some stock market crash like 1987, loss 20% in one day. Because I am using margin at about 1.5, so if that happens, the really bad thing will be I lost 30%.

But I don't know what kind of option is good for me to choose. I am thinking buy QQQQ put expiring two months later and the $2 more in price. For example, on Feb 1, I will buy March QQQQ. If the current price is $44, I will buy $46 put.

What do you think if I am doing the right thing? And I am also confuse the two ticker name, what's the difference between QQQOT and UQQOT for example. Thank you.
 
Tony,

If you're looking to "insure" your portfolio against a large market decline, you might want to consider purchasing options that are out of the money (the 46 put is actually in the money). They'll be less expensive and serve the same purpose (if indeed the market were to fall that much). Might want to look at the 40's (or less) and go a number of months out. When the position expires, you can roll it over to a new month.
 
Quote from runningman:

Look at QID, I think its a better way for you to hedge if you aren't familiar with options.
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Hi, runningman,

I looked at QID. But it looks it is not suitable for me because it uses too much buying power (50%?). I am thinking less buying power to hedge, say 5% of the account. If I misunderstand, please let me know. Thanks.
 
Quote from Q12:

Tony,

If you're looking to "insure" your portfolio against a large market decline, you might want to consider purchasing options that are out of the money (the 46 put is actually in the money). They'll be less expensive and serve the same purpose (if indeed the market were to fall that much). Might want to look at the 40's (or less) and go a number of months out. When the position expires, you can roll it over to a new month.
More...

Hi, Q12

If the current market price is $44, and I buy put at $40 at price at $0.05. Let's say tomorrow, the market go to $41. At this time, price is still out-of-money. I guess now the option price should still below $1. So I lost almost ($44-$41)/$44=7% in my long stock and just get only $1/$40=2% back, so I am still lost 5%. But if I buy put at $46 for $2, if the price go to $41, the $46 put will go to $5, and I get almost all the money back. Am I right?
 
Quote from tonyzhou:

Hi,

I have some questions about QQQQ option.

Basically, the purpose I want to buy some QQQQ puts is to prevent some stock market crash like 1987, loss 20% in one day. Because I am using margin at about 1.5, so if that happens, the really bad thing will be I lost 30%.

But I don't know what kind of option is good for me to choose. I am thinking buy QQQQ put expiring two months later and the $2 more in price. For example, on Feb 1, I will buy March QQQQ. If the current price is $44, I will buy $46 put.

What do you think if I am doing the right thing? And I am also confuse the two ticker name, what's the difference between QQQOT and UQQOT for example. Thank you.
More...

If you are concerned about the downside now, why not just take some thing off to reduce the margin and keep it simple.
 
Quote from Opra:

If you are concerned about the downside now, why not just take some thing off to reduce the margin and keep it simple.
More...

What I concern is the crash in a few days. Let's say if the market go down 20% in 3 months, then I have a lot of time to deal with that. But if the market down 20% in 1 day like 1987, it is a sudden and we have no time to deal with that, and lose money.

From the long term, the stock market is always up. But I have to hedge the short term risk. If the market go down 25 in one day, and I use 2 times margin, and my portfolio beta is 2, maybe I will lose everything in one day!
 
I actually have a related question, and hope some option expert can answer it.

Suppose I want to insure myself against a >5% drop in QQQQ. I'd buy OTM put options with a strike 5% below the current QQQQ price, at regular intervals (say monthly). I expect many times the options will expire worthless, and a few times they will expire ITM for a large profit.

What is the long-run expected cost of this insurance? I expect if the time frame is long enough all small losses would be offset by the occasional large gains, except for the premium and transaction costs (the latter two being the cost of the insurance). Is that correct?

I suppose it has to be, b/c otherwise selling the options (selling the insurance) would generate a sure profit beyond the premium.
 
You should really buy a minimum of 5 months of time for insurance. Otherwise the time decay will eat up any gains the puts will make. The other problem is that put options right now don't really pay you that much because volatility is so low. Believe me, if the market tanks, you will be expecting a good pay day and you will see that your option value hasn't increased as much as the market moved.
 
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