First Post - Intro and First Swipe @ an Options Strategy

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Denver Vol

I'm a 26 year old real estate private equity analyst and have just started diving into the world of options. I have allocated ~20k to start trading with (though I obviously won't plow it all into an asset class for which I am a complete novice at one time).

Right now I am of the mindset that this market is massively frothy. I have exited nearly all of my long equity positions, and would like to execute a bearish strategy over the next 9-12 months, at least.

My initial thought is to buy short term, slightly out of the money index calls (most likely on the S&P), while simultaneously buying longer term (6-12 month maturity), further out of the money puts.

Thematically, I expect a fairly significant, broad market correction in the medium term, but I would like to maintain some small upside if this market gets even more out of whack. I want far more exposure to a market correction than I do to continued upward movement.

I'm here to deepen my knowledge of options trading and refine my strategy, so feel free to call what I have outlined above a complete joke. I'm looking forward to your responses.
 
Also, I'm aware that this post his highly vague at this point. My hope is that the general thought would get the discussion going and specifics would fall out from there.
 
Personally, if I were bearish on the overall market or a particular sector, or an individual stock..... I would wait for it to get to a price I'm more comfortable with, and then invest in it.
Trying to pick a top is a VERY risky and dificult thing to do.
Plenty of investors have been trying to do that for the past several months, and are now more stressed than you can imagine.

Just as investors who have been investing using strategies with "borders", probably thought they were at more risk of a decline in their stock or index than a rise, over the past several months.
They too have been under a lot of stress, and paying for expensive adjustments,... as the market suffers the occasional down day, and then keeps trending higher.
Don't try to guess the market is my advice.
Pick your stock and pick your price, and wait for it to get there.
Remember, in the option world, you can be right, but your timing may be wrong.
And then your money is gone.
 
Thanks for the response.

I have been a value investing disciple for a while now, and generally think along the lines of your post. Recently, though, I've been reading a lot of Nassim Taleb material and I'm trying to explore if there is a viable way of implementing that type of strategy.

To be clear, I don't want to try to pick a top. I'm far too humble to attempt that and make big bets on it, but we've seen a relentlessly bullish market for a couple of years, complete with extreme margin debt, new index highs, etc. and so I'm trying to figure out how to position myself to gain from a correction, whether that happens in a month or a year, or two years.

I guess a better way to have phrased my question would be this: does anyone on here implement this type of "black swan" strategy on a smaller scale and have outstanding long-term trades for eventuality of a big correction.

Again, many thanks for the well-measured response. I'm looking forward to being able to discuss these topics more intelligently, but I appreciate you guys humoring me in the meanwhile.
 
As Mr Atticus says time is the killer in this strat. You need to sell at some point to offset the risks of time and vol. Spreads are better esp for your longer term buys. For your short term buys try the ES weekly calls. Its more directional but you can play for a lot less money.GL...
 
Quote from Denver Vol:

I'm a 26 year old real estate private equity analyst and have just started diving into the world of options. I have allocated ~20k to start trading with (though I obviously won't plow it all into an asset class for which I am a complete novice at one time).

Right now I am of the mindset that this market is massively frothy. I have exited nearly all of my long equity positions, and would like to execute a bearish strategy over the next 9-12 months, at least.

My initial thought is to buy short term, slightly out of the money index calls (most likely on the S&P), while simultaneously buying longer term (6-12 month maturity), further out of the money puts.

Thematically, I expect a fairly significant, broad market correction in the medium term, but I would like to maintain some small upside if this market gets even more out of whack. I want far more exposure to a market correction than I do to continued upward movement.

I'm here to deepen my knowledge of options trading and refine my strategy, so feel free to call what I have outlined above a complete joke. I'm looking forward to your responses.
More...
Your desire to benefit from a strong/likely down move but still benefit from an upward move is going to be difficult to design without also accepting that you'll have to keep your eye on things. If you don't need to make a killing on a downward move, but you just don't want to lose, why not look at a call ladder? Long call ~ATM, short call further out, another short call still further out. All for a credit.
 
Quote from Denver Vol:

I'm a 26 year old real estate private equity analyst and have just started diving into the world of options. I have allocated ~20k to start trading with (though I obviously won't plow it all into an asset class for which I am a complete novice at one time).

Right now I am of the mindset that this market is massively frothy. I have exited nearly all of my long equity positions, and would like to execute a bearish strategy over the next 9-12 months, at least.

My initial thought is to buy short term, slightly out of the money index calls (most likely on the S&P), while simultaneously buying longer term (6-12 month maturity), further out of the money puts.

Thematically, I expect a fairly significant, broad market correction in the medium term, but I would like to maintain some small upside if this market gets even more out of whack. I want far more exposure to a market correction than I do to continued upward movement.

I'm here to deepen my knowledge of options trading and refine my strategy, so feel free to call what I have outlined above a complete joke. I'm looking forward to your responses.
More...


While vol skew still remains relatively cheap on the back month options, this long gamma long vega strategy is going to kill you when it comes to premium. As time presses you'll be looking at your premiums wither away presuming the market stays in a range.

Those OTM back month puts look tantalizing as they presumably don't have a significant theta component (at least not yet) but if vol shrinks you'll be kicking yourself for having such a massive vega exposure.

The key to your market prognostication and appropriate options strategy implementation of it depends on what you believe will be the velocity of the correction. While markets never crash "nicely" there can be a sustained grind lower, which may actually warrant a different approach than the one you've outlined.

P.S. Since you're a PE analyst I presume your basis for a correction primarily rests upon valuation/fundamentals as opposed to some technical analysis?
 
Quote from Denver Vol:

Thanks for the response.

I have been a value investing disciple for a while now, and generally think along the lines of your post. Recently, though, I've been reading a lot of Nassim Taleb material and I'm trying to explore if there is a viable way of implementing that type of strategy.

To be clear, I don't want to try to pick a top. I'm far too humble to attempt that and make big bets on it, but we've seen a relentlessly bullish market for a couple of years, complete with extreme margin debt, new index highs, etc. and so I'm trying to figure out how to position myself to gain from a correction, whether that happens in a month or a year, or two years.

I guess a better way to have phrased my question would be this: does anyone on here implement this type of "black swan" strategy on a smaller scale and have outstanding long-term trades for eventuality of a big correction.

Again, many thanks for the well-measured response. I'm looking forward to being able to discuss these topics more intelligently, but I appreciate you guys humoring me in the meanwhile.
More...

The particular strategy that you desire is better implemented using options on VIX futures. Start by simulating some kind of ratio spreads with calls, you might find what you are looking for.
 
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