Buying put leap option to profit from a downturn

[randallchsu]

What are some good leap trades to explore? FFH has had some index put and cpi-linked cds.

 

Put leap on denmark banks? china fxi? s&p/nasdaq via proshare? taiwan via ishare?

[Guest Schwab711]

http://www.investopedia.com/stock-analysis/cotd/vxx20120626.aspx

 

That gives you a starting point but I think it is a stupid and expensive strategy. You should probably find a trading forum to get better information if you are dead set on this strategy. If you think the market will go down then just move to cash or hold T-bills to maturity. Inverse ETFs or long term options are extremely expensive! You don't have to play the market at all times... Good luck!

[kfh227]

Find out of favor comapnies that are so out of favor that the options are worthless.  AND POUNCE.

 

1) OIL

2) BBRY

 

Any other suggestions?

[jawn619]

Find out of favor comapnies that are so out of favor that the options are worthless.  AND POUNCE.

 

1) OIL

2) BBRY

 

Any other suggestions?

 

I think it is a common misconception that options get cheap when they make a down move. Out of favor and making a downmove are actually very different things. As stocks make big down moves like oil stocks or companies with some sort of negative catalyst, the options usually get more expensive. Expensive meaning the implied move gets bigger which means you have to pay more premium.

[TwoCitiesCapital]

Find out of favor comapnies that are so out of favor that the options are worthless.  AND POUNCE.

 

1) OIL

2) BBRY

 

Any other suggestions?

 

I think it is a common misconception that options get cheap when they make a down move. Out of favor and making a downmove are actually very different things. As stocks make big down moves like oil stocks or companies with some sort of negative catalyst, the options usually get more expensive. Expensive meaning the implied move gets bigger which means you have to pay more premium.

 

Actually, the premiums will likely fall but the volatility portion of that premium grows meaning as the stock price craters, you can pick up the options for cheaper, but that the premium becomes larger relative to the price of the underlying stock - essentially, the premium gets smaller but requires a larger % move in your direction to make the option pay.

 

Just thought I'd clarify. That beings said, low volatility, out-of-favor stocks are likely to be the ones with the cheapest options.

[Phoenix01]

I think the strategy has some merit but there is high probability that the investment goes to 0.

 

Long tail events are often mispriced and can offer a great opportunity if a downturn occurs.  Out of the money LEAPS are relatively cheap and you can make multiple times your investment, but you need to carefully select the company.  Only buy the option if it offers a huge payoff if the stock returns to a reasonable valuation.  My guess is that the biotech space has a few candidates.  Look for high price to cashflow and high debt levels.

[Uccmal]

http://www.investopedia.com/stock-analysis/cotd/vxx20120626.aspx

 

That gives you a starting point but I think it is a stupid and expensive strategy. You should probably find a trading forum to get better information if you are dead set on this strategy. If you think the market will go down then just move to cash or hold T-bills to maturity. Inverse ETFs or long term options are extremely expensive! You don't have to play the market at all times... Good luck!

 

I concur with this assessment.  I have bought puts on individual stocks and indexes many times.  I have actually made a small amount of money a few times, but mostly have lost. 

 

Problems I have identified with all puts (long, short, index, single stock): 

1). When do you sell?  In the handful of profitable instances in my case - usually way too early.

2) The event your predicting takes way too long to arrive - time value decay. 

3) Spectacularly wrong - anyone who bought SPY puts in the last 6 years. 

 

I have also used them to push off the tax man, until next yr (i.e. buying puts in November) and concluded it would have been better to sell the call or common I am protecting, and pay the taxes. 

 

My tendency is just to reduce the size of the position(s) I want to protect against.  FFH has much better economics of scale with hedging than we do, and even they got skewered. 

[Zorrofan]

So what's wrong with using BRK or FFH as a hedge instead?  BRK has a huge cash balance, which grows each month, and you know it will pounce during any major downturn. Plus if it does drop you have the chance to buy into the company at the same time they are increasing intrinsic value (i.e. you are likely getting a bargain).  As for FFH, they have cash, hedges and deflation puts. If the market crashes they will make a  lot of money off the hedges and puts. If it doesn't, well as Gio would say, each day they are growing the business in some of the fastest growing regions in the world (hint: think India).

 

my $0.02

Zorro

[Jurgis]

Using FFH or BRK as conservative position is not bad as long as you don't expect them to behave as cash (i.e. not drop XX% on market drop).

 

FFH is my largest position and I hold a bit of BRK and MKL too.

[BargainValueHunter]

Using FFH or BRK as conservative position is not bad as long as you don't expect them to behave as cash (i.e. not drop XX% on market drop).

 

FFH is my largest position and I hold a bit of BRK and MKL too.

Yeah, I've learned the hard way that the best way to take advantage of a crashing market is to be long a company best positioned to profit from the turmoil.

 

PRAA was my best holding in that regard (sold way, way too early) and I can't find any others save for FFH and BRK.

 

I think everyone looks to go exotic with swaps or options because they want to be the next Dr. Michael Burry.

[frommi]

If you are really concerned that the market is too expensive, its probably not a bad idea to sell some stocks and buy 30 year treasuries and gold or switch to cash. But that of course is market timing/asset allocation, so you will probably have a hard time discussing this with value guys. :)