shorting stock vs buying put

[hedgex]

I have strong bearish sentiment on many eft's and would like to choose a strategy between shorting the stocks or buying puts.

The issues with put buying are twofold:
1. The volatility, therefore the premium, is unusually high. Right now the VIX is 35. Options look expensive, more so with levered etfs.
2. The selection of strikes and maturity terms. I know the lower the strike, the higher the leverage. The inverse etfs have higher volatility above the money. Right now the near term options, JUNE, have high volatility.

With ATM puts, the delta is roughly 50. So one contract is equivalent to 50 shares. I figure the maximum premium must be less than half the spot price -- otherwise shorting the stock is clearly advantageous. If IV is 1.0, a 1.5 year leap ATM put at 0.5Spot sounds like an OK deal. But I can't figure out how to quantitatively pick the strike and the term. Any thoughts?

 

[Retief]

Buy inverse ETFs and avoid the need to buy puts or short.

 

[Whistlingleaf]

I like inverse ETFs and selling ATM front month covered calls against them.

I've been doing this on EDZ since October and am way ahead just from the premium selling. This will be the first month I will have to buyback the calls for more then the premium sold.

So I was bearish on some positions and wrong and still came out ahead - can't beat that IMO.

 

[spindr0]

Quote from hedgex:

I have strong bearish sentiment on many eft's and would like to choose a strategy between shorting the stocks or buying puts.

...I can't figure out how to quantitatively pick the strike and the term. Any thoughts?

It's a function of risk verus reward and timing and selection.

In terms of option buying:

OTM = lower delta, higher levearage, higher probability of loss

ATM = delta of 50, highest time premium

ITM = higher delta, lower levearage. lower probability of loss

And then there's the problem of time decay. Good timing? Buy short term options. Not so good? Buy longer.

If you're timing, selection AND money management really are good, short the stock. More bang for the buck and fewer obstacles.

 

[zdreg]

Quote from Retief:

Buy inverse ETFs and avoid the need to buy puts or short.

are u talking for a short period of time or a long one?

 

[nazzdack]

Quote from hedgex:
----I would like to choose a strategy between shorting the stocks or buying puts.
----The volatility, therefore the premium, is unusually high.
----The selection of strikes and maturity terms......
----The inverse etfs have......
----I figure the maximum premium must be less than half the spot price....
----I can't figure out how to quantitatively pick the strike and the term. Any thoughts?

1) Make sure you can actually short-sell the stocks you want to trade.
2) Make sure you properly understand why option premiums on those "difficult to short-sell" stocks appear the way they do.
3) Make sure you properly understand the concept of "tracking error" with ETF's.
4) When volatility gets "high", focus more on spread-trading with options instead of outright purchases.
5) Make a decision to start somewhere and hope for the best.

 

[noob_trad3r]

Quote from Whistlingleaf:

I like inverse ETFs and selling ATM front month covered calls against them.

I've been doing this on EDZ since October and am way ahead just from the premium selling. This will be the first month I will have to buyback the calls for more then the premium sold.

So I was bearish on some positions and wrong and still came out ahead - can't beat that IMO.

Why buy them back for more? just let them get called away.