Buying deep OTM put options

sle · Jul 2, 2011

Quote from Martinghoul:

In general (and this may be slightly off-topic), read Montier's excellent piece on "black swans".

Dude, we never finished our BBG discussion on "what things are cheap and convex and will help you if the world blows up"...

Martinghoul · Jul 2, 2011

Quote from sle:
Dude, we never finished our BBG discussion on "what things are cheap and convex and will help you if the world blows up"...

Yes, I remember... I think the world blew up and we had to stop

.

fk1028 · Jul 2, 2011

This thread is about OTM puts. May be the gurus here can shed some light on this activity.

I saw SPX JulWk2 (07/88) 1025P and 1050P traded 1000 contracts each at the same time within one minute around 4:12. A few minutes before option closing. That is approx. 3000 Dow points away for 3 holidays/Wkend days + 4 trading days. What is going on with this kind of trade? What are the buyers trying to protect.

Thanks,

Frank

rdg · Jul 2, 2011

I figure that if I am going to make a career in the market, I have a few choices. I can trade unleveraged, I can trade with leverage and be lucky, or I can hedge leveraged positions with options. A disaster stop works and is cheaper than options in every trade except for the one that ends a career. That's the real benefit; it's guaranteed execution at the exact moment when I NEED execution. Who cares if there aren't bids in the options market at the time? It's a contract and it will be honored when I call up to execute it.

Lucias · Jul 2, 2011

They could be sellers buying them back. They might buy them back if they thought they weren't decaying fast enough in value or they might be concerned the volatility will rise. So, they took this time to lock in profits.

Quote from fk1028:

This thread is about OTM puts. May be the gurus here can shed some light on this activity.

I saw SPX JulWk2 (07/88) 1025P and 1050P traded 1000 contracts each at the same time within one minute around 4:12. A few minutes before option closing. That is approx. 3000 Dow points away for 3 holidays/Wkend days + 4 trading days. What is going on with this kind of trade? What are the buyers trying to protect.

Thanks,

Frank

Betapeg · Jul 3, 2011

Quote from Lucias:

One of my futures strategies does best with a catastrophic stop. The problem with such a large stop is the psychology and having a huge loss and also having to close such a position out.

I see 2 ways of mitigating this issue:

A. Trade the vertical or call spreads instead of the futures. I am trading this system at NADEX and performance is good. I feel futures are the most efficient market. Right now its not an issue as my size is less then $50/point.

B. Buy deep out of the money put option.

I would like to get any opinion or experiences with using such options to protect against an active futures trading. Right now I can purchase the 1270s about $575 -- not sure when that expires though.

In other words, instead of using stops, I'd carry a few deep otm put options and trade in-and-out without worry and without stops.

I'm looking feedback for the feasibility and expense of using such a strategy and how it would compare to always buying the limited risk/reward spreads.

Howard, so what you are doing is selling the put/call spreads OTM? I.e I buy the 1260 put and sell the 1275 put then I collect the full amount if we close above 1275?

Selling options is way better than buying them. Time value decay works against you as the buyer. Who likes being right on the market but making little, nothing, or losing because of time value decay?

HowardCohodas · Jul 5, 2011

Quote from Betapeg:

Selling options is way better than buying them. Time value decay works against you as the buyer. Who likes being right on the market but making little, nothing, or losing because of time value decay?

It depends.

Martinghoul · Jul 5, 2011

Quote from Betapeg:
Who likes being right on the market but making little, nothing, or losing because of time value decay?

Erm, someone who doesn't like losing a lot of money, maybe?

FrankSlaughtery · Jul 6, 2011

Quote from Betapeg:

Selling options is way better than buying them. Time value decay works against you as the buyer. Who likes being right on the market but making little, nothing, or losing because of time value decay?

"I completely agree. Unfortunately my investors don't."

-victor niederhoffer

zdreg · Jul 6, 2011

Quote from FrankSlaughtery:

"I completely agree. Unfortunately my investors don't."

-victor niederhoffer

not someone with exactly a stalwart track record but a line of bs second to none.