how do you diminish risks for heavily ITM puts in a market downturn?

C

cognitivefun

Please pardon my asking what may seem a stupid question.

Assume I buy JAN04 puts today, say on some stock, at some strike price that is slightly OTM.

Now comes June and there is a big market downturn. The stock falls 40%, which makes my puts very very deeply ITM.

What are my risks that might prevent me from taking profits when I want to?

What about counter-party risk...how do I know the counter-party will be able to deliver my cash if I choose to exercise? (I am assuming American style options).

And if I have puts in a thinner traded option market than the stock I chose, what assurances do I have that there will be a market if I want to simply sell my deep ITM puts?
 
Quote from cognitivefun:

Please pardon my asking what may seem a stupid question.

Assume I buy JAN04 puts today, say on some stock, at some strike price that is slightly OTM.

Now comes June and there is a big market downturn. The stock falls 40%, which makes my puts very very deeply ITM.

What are my risks that might prevent me from taking profits when I want to?

What about counter-party risk...how do I know the counter-party will be able to deliver my cash if I choose to exercise? (I am assuming American style options).

And if I have puts in a thinner traded option market than the stock I chose, what assurances do I have that there will be a market if I want to simply sell my deep ITM puts?
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Cognitive fun;
You can 4get about counterparty risk;
you may ''put'' much more time & money in things like

Four biggest mistakes in option trading
book by Jay Kaeppel.


:cool:
 
In futures the Clearing Association at the particular exchange guarantees each transaction and the participants are shielded from counterparty risk. The same Associations guarantee the futures option trades.

I just assumed that in US equity option trading the Option Claring Associations at the respective exchanges guarantee the trades and there is no counterparty risk.
 
I'm no expert on calendars, but I suspect you will lose your entire investment if you purchase OTM Jan04 puts today.
 
Quote from One:

I'm no expert on calendars, but I suspect you will lose your entire investment if you purchase OTM Jan04 puts today.
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Of course it is quite likely ;)

Perhaps JAN05 might be better...although you will probably lose your entire investment even then :)
 
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