So, is my newb math right regarding these SPY puts?

Saltynuts · Jan 30, 2020

I am looking here:

https://finance.yahoo.com/quote/SPY210115P00191000?p=SPY210115P00191000

That is a January 15, 2021 put. So basically a 12 month put. Strike price is at 191. The ask is 86 cents. SPY is currently at currently call it 328.

(328-191)/328 = 41%

.86/328 = .26%

So, basically, for .26% a YEAR in lost upside, I could protect against anything more than a 41% drop? That seems like a HELL of a deal. And that is on the ask, the bid is much lower! I know, many of you will say a 41% drop is horrendous, and it is, but if I could live with a 41% drop, but might not be able to live with a 50% or 60% or 70% or more drop, that just seems like a very reasonable price to pay for that insurance. I'd guess that that Naseem Taleb guy that you guys always talk about would agree in any event lol.

Thanks!!!

bpr · Jan 30, 2020

for put at strke price at 191 the protection is only when price goes below 191 not before ...

Saltynuts · Jan 30, 2020

bpr said:
for put at strke price at 191 the protection is only when price goes below 191 not before ...

I fully understand that bpr, that's why I said 191 strike would be appropriate for me if I could suffer a 41% loss, but could not suffer more. I think we are on the same page, are we not?

But, to be fair, there would be SOME protection before price went below 191, as SPY got closer and closer to 191 the "closer to at the money" premium builds, whatever that is called.

Thanks!!!

bpr · Jan 30, 2020

Saltynuts said:
I fully understand that bpr, that's why I said 191 strike would be appropriate for me if I could suffer a 41% loss, but could not suffer more. I think we are on the same page, are we not?

But, to be fair, there would be SOME protection before price went below 191, as SPY got closer and closer to 191 the "closer to at the money" premium builds, whatever that is called.

Thanks!!!

oh ok then ...

nooby_mcnoob · Jan 30, 2020

Saltynuts said:
I am looking here:

https://finance.yahoo.com/quote/SPY210115P00191000?p=SPY210115P00191000

That is a January 15, 2021 put. So basically a 12 month put. Strike price is at 191. The ask is 86 cents. SPY is currently at currently call it 328.

(328-191)/328 = 41%

.86/328 = .26%

So, basically, for .26% a YEAR in lost upside, I could protect against anything more than a 41% drop? That seems like a HELL of a deal. And that is on the ask, the bid is much lower! I know, many of you will say a 41% drop is horrendous, and it is, but if I could live with a 41% drop, but might not be able to live with a 50% or 60% or 70% or more drop, that just seems like a very reasonable price to pay for that insurance. I'd guess that that Naseem Taleb guy that you guys always talk about would agree in any event lol.

Thanks!!!

My opinion is that if you are long and the market takes a turn downward, then rather than exit your position, reevaluate whether the long thesis is still true (dividend yield, growth, etc) and sell covered calls to recover some of the loss. It is unlikely that the market will move down 10% every week so some weeks you'll probably be in the green but most weeks you'll be red until the market turns.

Otherwise you'd probably take a tax hit for no reason and/or lose out on dividends.

tsznecki · Jan 31, 2020

nooby_mcnoob said:
My opinion is that if you are long and the market takes a turn downward, then rather than exit your position, reevaluate whether the long thesis is still true (dividend yield, growth, etc) and sell covered calls to recover some of the loss. It is unlikely that the market will move down 10% every week so some weeks you'll probably be in the green but most weeks you'll be red until the market turns.

Otherwise you'd probably take a tax hit for no reason and/or lose out on dividends.

Disagree with the covered calls. If the market recovers, you just locked in a loss and/or capped your upside. The CCs only work in a sideways down stair stepping market, and that is rare.

If one was good enough to predict the right conditions for said CCs, one is good enough to get out before the downturn. Tax reasons aside.

FriskyCat · Jan 31, 2020

Saltynuts said:
I am looking here:

https://finance.yahoo.com/quote/SPY210115P00191000?p=SPY210115P00191000

That is a January 15, 2021 put. So basically a 12 month put. Strike price is at 191. The ask is 86 cents. SPY is currently at currently call it 328.

(328-191)/328 = 41%

.86/328 = .26%

So, basically, for .26% a YEAR in lost upside, I could protect against anything more than a 41% drop? That seems like a HELL of a deal. And that is on the ask, the bid is much lower! I know, many of you will say a 41% drop is horrendous, and it is, but if I could live with a 41% drop, but might not be able to live with a 50% or 60% or 70% or more drop, that just seems like a very reasonable price to pay for that insurance. I'd guess that that Naseem Taleb guy that you guys always talk about would agree in any event lol.

Thanks!!!

Well there is also the potential of the market dropping 35% between now and Jan 15, 2021. At expiration your put expires worthless and your underlying SPY shares are down 35% with nothing to offset the drawdown.

nooby_mcnoob · Jan 31, 2020

tsznecki said:
Disagree with the covered calls. If the market recovers, you just locked in a loss and/or capped your upside. The CCs only work in a sideways down stair stepping market, and that is rare.

If one was good enough to predict the right conditions for said CCs, one is good enough to get out before the downturn. Tax reasons aside.

Well at least your tax reason is on the way up so you get the highest tax loss at the time where the market is turning. Timing could be good there.

Thoughts?

S2007S · Jan 31, 2020

FriskyCat said:
Well there is also the potential of the market dropping 35% between now and Jan 15, 2021. At expiration your put expires worthless and your underlying SPY shares are down 35% with nothing to offset the drawdown.

I'm not a professional at all in option trading, tried to understand it but cant grasp it. But even though the put would expire worthless wouldn't a 35% drop in the s&p still bring those puts higher from the 86 cents original purchase price?

FriskyCat · Jan 31, 2020

S2007S said:
I'm not a professional at all in option trading, tried to understand it but cant grasp it. But even though the put would expire worthless wouldn't a 35% drop in the s&p still bring those puts higher from the 86 cents original purchase price?

Yes, absolutely, but at some point he'd have to decide when and where to dump the SPY shares or roll out the puts to a further date and/or strike price lower. The problem, of course, is that if the market were to drop 30-40% in the next year the cost for protection would increase dramatically. Meantime, he's down on the underlying shares (Alot) and he'd have to pay up for the roll out with the risk that the market boomerangs higher but not enough to recapture the lost profits (i.e. limbo on the SPY shares).