What is the most simple/efficient way to accomplish this trade?

[pianoman]

I would like to construct a bearish trade that would profit maximally if the SPY would fall down to the 80's sometime within the next 1-2 years. I want a trade that would have limited losses, so I want to primarily buy the options. Also, I want it to be the most "efficient" or asymmetric - i.e. invest the smallest amount but have the maximum return if the SPY were to drop into the 80s.

Instead of just buying distant OTM leap puts, I thought of doing a vertical spread where for example, I would buy the 80 puts, and sell the 60 puts. This would have the added advantage of minimizing losses from time decay during that time.

However, the vertical spread would also minimize any profit on the long puts from rising volatility, which we would likely see during sharp market declines.

So my question is, what is the most simple / elegant way to accomplish the above trade, minimize time decay, and be long volatility?

 

[NeuromanceR]

You could try a vertical ratio spread.

 

[Sell 'em]

Quote from pianoman:

I would like to construct a bearish trade that would profit maximally if the SPY would fall down to the 80's sometime within the next 1-2 years. I want a trade that would have limited losses, so I want to primarily buy the options. Also, I want it to be the most "efficient" or asymmetric - i.e. invest the smallest amount but have the maximum return if the SPY were to drop into the 80s.

Instead of just buying distant OTM leap puts, I thought of doing a vertical spread where for example, I would buy the 80 puts, and sell the 60 puts. This would have the added advantage of minimizing losses from time decay during that time.

However, the vertical spread would also minimize any profit on the long puts from rising volatility, which we would likely see during sharp market declines.

So my question is, what is the most simple / elegant way to accomplish the above trade, minimize time decay, and be long volatility?

You appear to suggest that you think the S&P will fall into the 80s most likely 12-24 months out. It that case I would want to work a position that incorporates the expectation re: timing. (Very critical when it comes to options.)

In this instance, during early days I might judiciously sell calls, perhaps ITM calls. As it gets nearer my 12-24 month window, I might be more aggressive in buying puts outright. I would continue to work a position that includes selling calls, buying puts, and selling the other leg of puts.

Your expectations include a time element that should be exploited. Moreover, your expectations may morph over the targeted time period. Finally, there will be nearer-term trading opportunities within the position itself that a great trader would take advantage of. Working a combination of short calls and a bear put spread could address/accomplish all of these aims. In the end you may have maximized gains while minimizing losses. Or you may lose yourself along the way. Execution takes real skill, and discipline.

 

[spindr0]

The SPY is going to "fall down to the 80's sometime within the next 1-2 years."

Is that next week or 2 years from now?

Is that 89.99 or 80.01 ?

You want limited losses.

You want something that profits maximally.

You want to invest the smallest amount.

You want the maximum return.

You want mimimal time decay.

You want to benefit from IV expansion.

Would you like diinner and a ride with Santa Claus too?

 

[nazzdack]

Quote from spindr0:
Would you like dinner and a ride with Santa Claus too?

1) Well come on, it is the month of December after all.
2) The ratio-put-spread would be "tough" because the skew is steep. The separation between strike prices would have to be larger than desired.
3) You could consider (put debit)/(bear put) spreads at adjacent strikes with the long strike being slightly above your downside expectation. That way, you're paying a "~dime" in order to make a "~dollar".

 

[Martinghoul]

Quote from nazzdack:

2) The ratio-put-spread would be "tough" because the skew is steep. The separation between strike prices would have to be larger than desired.

Wouldn't steep skew actually make a ratio put spread "easier"? Specifically, all else being equal, it will make it cheaper to get into...

 

[nazzdack]

Quote from Martinghoul:
.....ratio put spread.....

?....!.....(middle age moment)....Oh my! I "read" ratio-put-spread but was "thinking" put-backspread.

 

[talontrading]

I don't understand this reply. Put spread - either calendar or vertical - is the right answer to the OP's question.

Quote from nazzdack:


2) The ratio-put-spread would be "tough" because the skew is steep. The separation between strike prices would have to be larger than desired.

 

[nazzdack]

Quote from talontrading:
I don't understand that reply.

1) Replace "ratio-put-spread" with "put-backspread" to make better sense of it.
2) To focus on strategies that emphasize the 80 strike price all have merit.

 

[spindr0]

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Quote from spindr0:
Would you like dinner and a ride with Santa Claus too?
----------------------------------------------------------------------

Quote from nazzdack:

1) Well come on, it is the month of December after all.

OK, comped dinner and ride with Santa in 2+ weeks.

This is one of those run in circles chasing your tail question/answers. There's no way to provide an optimal strategy without precise inputs. SPY falling to the 80's sometime within the next 1-2 years is too non specific. Many strategies that will profit at 85 will be losers at 80 and vice versa, etc. But hey, maybe we can find a dinner companion for him