Quote from BrandNewTrader:
I'm guessing this was supposed to be mildly sarcastic.
The trade is pretty straightforward and hinges on the impact of the coming recession on the markets. Comparing this coming severe recession to the mild recession we had in 2001 shows me that the SPY's fell to ~$80 by October 2002. Given that this recession will turn out to be much worse for both consumers and businesses than the previous - a conservative target "bottom" for the SPY's is between 70-85.
As for timing, we should be in recession by Q406 - Q1'07. By this time the market will have declined on the bleak growth outlook, but may not yet have crashed or suffered its worst declines to come. I expect that these events should take place throughout 2007, with the market hopefully bottoming out in mid to late 2007 and giving me a chance to get out of the Dec 07 puts without surrendering too much theta.
That's why I'm comfortable with the strike levels and expirations. The one thing that could get me is if events occur to manifest a slow and steady market decline through 2008. This would yield gains, but not the types of gains I'm gunning for.
Theta decay isn't too much of a concern since my options are so out of the money that theta won't become an issue until the several weeks leading up to expiration, if I am still holding the contracts.
As for me buying pure vega? Well, I'm not sure what you're getting at (riskarb) in referencing the upcoming Fed decision. I'm hoping to buy more contracts for my money in the event of a rally. The vega and/or implied vol levels are almost a non-issue since given my market view and expectation of severe price declines, market vol and the implied vol on my contracts will increase two to four-fold, thereby harnessing all the vega originally purchased. Is this what you were getting at? I'm not sure...
Anyway. I don't see why this is seen as a crapshoot. I admit that calling direction and timing is not something someone should publicize, let alone bet big money on. However, given the current state of the economy and all of the fundamental indicators it seems to me like anyone NOT expecting bad things for the market and economy going forward isn't paying attention to the big picture (too much focus on specific stocks/sectors? Watching too much Mad Money? I don't know...). As for timing - I'm only going so far as December 07 puts. The 08's are a little out there and way too expensive.
Oh, and I thought about ES puts, but I am electronic-only and I think the contraqcts only go out to Dec 2006. I am looking at the big S&P pit-traded futures contract, but have to get setup to trade pit futures. I will probably only buy a few puts for Dec 07 on this contract - not sure.
Also looking for ways to play the dollar without going pure currency. Looked at the currency ETF's but none of them have options, so may just stick with the CME eurodollar contract and gold. Any ideas on currency exposure to franc, krona, euro, yen without opening a currency trading account?
A constructive way of negating my long-dated OTM put strategy would be to outline why there's going to be a "soft landing" and no U.S recession... rather than telling me I'm buying lottery tickets.
Does anyone else have an idea for a play on this event (or similar) with same/better leverage? I'd love to hear it...
