Friday, March 05, 2021 10:22:50 AM
This discussion on Puts really helped me. I have been mulling a lot of things over in my mind since a discussion I had with a Hedge Fund trader last week who was active up to 2000 and now just trades for himself.
As I worked to figure out exactly how he was trading I noticed that for the same OTM levels, puts were much more expensive than calls. I first thought this was just because market was going down but the more I studied I realized that was not the reason.
https://www.thebalance.com/why-puts-cost-more-than-calls-2536866#:~:text=For%20almost%20every%20stock%20or%20index%20whose%20options,the%20calls.%20They%20also%20have%20a%20higher%20Delta.
So the trader I talked to, would buy a put that is 9 months out. He holds it until there is 3 months left on the contract and then rolls it into a new 9mon holding. He does this because most of the TV is lost in the last 1/4 to 1/3 of the original time of the contract. My take on this is that it is a pretty expensive way to protect oneself. But I actually think many traders do this. I always want to match the S&P, but they are happy with 75% of it and sleep at night.
Putting together what you said and what I have been checking into, I think I have come up with maybe a good plan.
First there is really no need to have protection all the time. Just using my M65 TA will pretty easy pinpoint when the market might turn. I marked the chart below at the points I would have been concerned about over the past 3 years. The 2 years before that were smooth sailing. I marked only 5 spots in 3 years.
So clearly we have all been worried the last several weeks and those fears have come true. So after the w4 dip at the beginning of Feb it was clearly time to option up.
I thought the best way to help pay for a put is to sell a call. So how far OTM should I sell a call. After looking at bunch of stuff, I came up with a figure of 6%. This was far enough OTM that the likely hood of being hit was pretty low, but close enough to provide some reasonable funds.
Let's say I picked Feb 8th as the day to protect up, SPY closed at 390.51. A 6% OTM call is 414. I would choose to go with a Apr16 415 C and get paid $2 and is now worth $.46. 67 days of protection seems enough.
If I add a $1 to that number (at a cost of only 1/390=.2%) I could have bought a Apr16 330P for right at $3. 330 is 15% OTM, which I believe is excellent protection.
So for a cost of $1, .2%, I am protected from more than a -15% drop.
What do you think?
As I worked to figure out exactly how he was trading I noticed that for the same OTM levels, puts were much more expensive than calls. I first thought this was just because market was going down but the more I studied I realized that was not the reason.
https://www.thebalance.com/why-puts-cost-more-than-calls-2536866#:~:text=For%20almost%20every%20stock%20or%20index%20whose%20options,the%20calls.%20They%20also%20have%20a%20higher%20Delta.
So the trader I talked to, would buy a put that is 9 months out. He holds it until there is 3 months left on the contract and then rolls it into a new 9mon holding. He does this because most of the TV is lost in the last 1/4 to 1/3 of the original time of the contract. My take on this is that it is a pretty expensive way to protect oneself. But I actually think many traders do this. I always want to match the S&P, but they are happy with 75% of it and sleep at night.
Putting together what you said and what I have been checking into, I think I have come up with maybe a good plan.
First there is really no need to have protection all the time. Just using my M65 TA will pretty easy pinpoint when the market might turn. I marked the chart below at the points I would have been concerned about over the past 3 years. The 2 years before that were smooth sailing. I marked only 5 spots in 3 years.
So clearly we have all been worried the last several weeks and those fears have come true. So after the w4 dip at the beginning of Feb it was clearly time to option up.
I thought the best way to help pay for a put is to sell a call. So how far OTM should I sell a call. After looking at bunch of stuff, I came up with a figure of 6%. This was far enough OTM that the likely hood of being hit was pretty low, but close enough to provide some reasonable funds.
Let's say I picked Feb 8th as the day to protect up, SPY closed at 390.51. A 6% OTM call is 414. I would choose to go with a Apr16 415 C and get paid $2 and is now worth $.46. 67 days of protection seems enough.
If I add a $1 to that number (at a cost of only 1/390=.2%) I could have bought a Apr16 330P for right at $3. 330 is 15% OTM, which I believe is excellent protection.
So for a cost of $1, .2%, I am protected from more than a -15% drop.
What do you think?
Trade the Charts and not the Heart - Expect the trend to
continue until it doesn't - Realtime is the real deal
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