Replies to post #71591 on Zeev's Turnips Patch-No Politics (ZEEV)

[Zeev Hed]

Thanks, that is more rational, and makes a lot of sense, they are actually pocketing some money on this, they are probably going to close that (one leg at a time?) long before Jan 2005.

Zeev

[alohamart]

Edit: if you take out both sides and add back the net difference (8,251), you get a still very bearish closing equity p/c ratio of .416. This may be the most accurate way to adjust the #'s, since this is the net positive # of puts bought in this trade. Also, just noticed that both sides or in 2005, so it's not a calendar spread, as I first posted -- just a good-sized bear credit spread, or a cheap way to get a good chunk of leap puts. Both sides will probably be closed at the same time, with the bulk of the profit coming from the difference in the number of puts bought vs. those sold (hence counting the net difference is, IMO, the most accurate way to do it).

Actually, if you take out both sides of this big QQQ trade, the equity p/c ratio closed at a very bearish .39 (using updated closing CBOE figures, which are now available at their site), and the overall p/c ratio closed at .66.

I know you can't really just take it out, but it really shouldn't all be counted as the contrary-indicating buying of equity puts.

The actual, skewed figures could cause some bulls to get too bullish...

[mlsoft]

A bear spread, and a very smart play in my opinion. Essentially, both puts are at zero premium and unless the Q's have a serious rally, they will remain that way, which means the worst he can do is break even on the contracts while pocketing the interest drawn on the excess from the sale of the 55 puts.

The interesting part is that if he is right and the markets (including the Q's) tank, he can lift all or part (depending on how much risk he was willing to take) of the hedge by selling the 45 strike puts at some point when he considers the markets to be at a bottom - he can do it all at once, or he can do it in stages as the market goes down. That not only gives him a big profit on those puts (temporary, but he can draw interest on it for a while), but also gives him up to almost 2 years (depending on how long it took the market to make bottom) for the market to recover for him to make a profit on the 55 strike puts from that point.

The remaining short put position would be deep in the hole at that point, but totally offset by the gain in the 45 puts. In effect, he would be locked into a long position at that price on the Q's with no cost whatsoever, and drawing interest on a bunch of money. Note that he could care less if the Q's never even approach 55, since he will profit dollar for dollar on any rise from the level he took the bear leg off. His only risk would be for the market to continue to go down.

Not bad - I wish I had thought of that, but even more, I wish I had the bucks to do it <gg>.

mlsoft

[hedger]

As I understand this trade, it is a Bull Put Spread.
The max loss on this trade will occur if the QQQ closes below 45 at expiration and max gain if they close at or above 55.
However, the max loss for this trade (difference in strikes minus net credit)or 10 minus 10 = 0.
Thus, this trade provides a credit with almost zero risk and additional gains if the QQQ expires above 45.

Edit: forgot to mention that max profit is limited to the credit received