Using Options for Crash Insurance

[MTE]

Quote from TradStSOX:

regarding the quote below about the Ex-dividend issue, now this would only apply to options on stocks and not apply to the index options right?

"American-style call is usually exercised early if it is ITM and the stock goes ex-dividend. "

Of course, since index options are European-style (well, except for OEX).

 

[MTE]

Quote from TradStSOX:

trust me, not so...(the extrinsic value of the UN sanctions option apply in this case )

I'm sure you can find it online.

 

[TradStSOX]

very valid points, hope Nazz and others feed back on the issues you've brought up.
I also plan to do something similar, except buy the NTM calls since I expect it to be hit and sell the further OTM calls which I do not expect to be hit. Thus collecting twice on the direction and level I expect the price to go.
Now this situation occurs for me when say price at 715 and I expect both 710 & 720 to get hit and don't know by which order though. Therefore would be wanting to short the future at 715 with target at 710 and buy the 720 calls and sell the 730 calls... does this make any sense? how many 730 calls need to sell to cover the cost of the 720 call when price at 715 with 1 month to expiry and volit. at say 50%?

Quote from chanelops:

In order to put some numbers on Nazzdack's idea, I did a little bit of analysis, see below.

I did this using the OptionsXpress "pricer" tool, because it was handy and easy to use. It's pretty inaccurate for way OTM options, but that doesn't matter here. These start way OTM, but we can get that price from the bid/ask. Then as the underlying drops, they become ITM, and pricer works OK. One other thing about pricer, it doesn't do futures options, so I used puts on IWM. Just multiply everything by 10 to get the corresponding numbers for the ER mini, more or less.

OK, a 65 strike March IWM put has an ask of .37 now, with 23 days left and volatility of 26%. If IWM crashes overnight to 64 (10% drop), then the put goes to $2.20, assuming constant volatility. Of course, volatility is not constant. I'm not sure what the volatility would be, so I tried both 50% and 70%. (Just for comparison, in the 1987 crash OEX had a volatility of over 80%, and we all know SPX is less volatile than RUT)

So, at 50% volatility and IWM=64, the put is now worth $3.72. And at 70% vol, it goes to $4.99. Keep in mind that the intrinsic part of this is only $1.00!

So I think Nazz is absolutely right. If you own a put worth $5.00, are you gonna exercise early and only get $1.00 worth of value out of it? I doubt it, you'll probably just sell it and get the full value.

So that removes the worry about an immediate exercise -- I didn't realize the numbers were quite this large.

Of course, come expiry, if the put is still ITM, someone is going to exercise it, so you have to be ready and plan for that, maybe by buying it back before, on a bounce a few days after the crash. But you have some time to worry about that and how to resolve it.

However, it looks to me like you could incur some costs getting this worked out, if that situation happens. Say the bounce doesn't happen, or the underlying falls further. Couldn't you be stuck for the difference between the 650 put you're short and one of the 630's you're long, worst case? Or you could buy the put back, paying for part of it by selling your second 630 put that you're long. But if the put costs 50 points to buy, that's an expensive purchase.

So, I'm still undecided about this. It seems to me that buying a straight put from the gitgo entails less risk, and maybe less cost.

 

[nazzdack]

Quote from TradStSOX:

again to help us understand better and BTW thanks for all your help so far.
Then under the situation below, if the 715 call had a premium of 30 when price at 640, then the 715 put is worth(roughly) 105, did I get that right?
any good readZ(available on line(I'm presently overseas, can't buy books)) on the extrinsic value calculation of the options? as to how does volatility and time value should measure into it?
thanks

1) ?......715Call at 30......715Put at 105, correct
2) Regarding books, I started with Natenberg, then Cottle.