# Optimal Put-Buying Strategy for Market Crash Insurance



## peterk (May 16, 2010)

I want to increase my stock holdings by about 20-30k, but am too nervous to do so without protection. So, I'd like to embark on a put-buying insurance strategy to defend against a decline in the S&P500 (SPY). I am completely new to options here, so please feel free to lambast any incorrect or dumb thoughts on my part...

I'm trying to decide on strike and duration, my initial thinking is:

- Buy a 10% OTM put at about 8-10 weeks duration, rolling forward every 2 months, just before expiration. This will cost about ~3%/yr of the value of the 100 shares. The risk I see here is that what if there is a gradual stock market decline? I will feel the full brunt of the decline, and not profit from the puts at all.

- Buy a 10% OTM put at 4-5 months, rolling at 1 month remaining. This will cost about ~5%/year of the value of 100 shares, but with a better chance of protection against a market decline that happens more gradually instead of fast.

- Buy/sell a put spread that's ATM and 5% OTM, 8-10 weeks duration. This will cost about 7%/year, and will profit from any market decline, even a very gradual one, but will cost the most, and the upside is capped significantly. This isn't really the "insurance" (small payments for loss protection against a costly and unlikely event) that I'm looking for.

In observing the declines that were all larger than 10%, in 2008, 2011, and 2016, they all happened very rapidly, over a period of 4-8 weeks to get to a 10%+ decrease in price, and ITM for my 8-10 week strategy, so I'm tending to lean towards that.

Open to suggestions and commentary.


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## janus10 (Nov 7, 2013)

This is a really good question IMO and you seem quite a bit more knowledgeable about options than you let on.

This is just off the top of my head, but what type of account will you be using? Obviously a margin account gives you additional flexibility.


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## lonewolf :) (Sep 13, 2016)

for get Canada play US market. Deep in the money leaps spy or SPX Dec 2018 with little to no premium roll over when about 12 months left in contract. Positive curvature market declines premium will expand market rallies option has no choice but to rise point for point.

& or buy leap puts

If holding long term I would not protect with options less then 6 months out time decay to powerfull go with leaps @ least Dec 2017 & over would go with far out of the money


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## Argonaut (Dec 7, 2010)

I think if you're worried about risk, less equity exposure would be preferential to hedging with puts. In my personal line of thinking, puts are a tool to profit from a rapid decline as you see it happening. If you're constantly buying them as insurance you're just going to get killed by time decay. If I was you I'd keep more cash instead to sleep better at night.

There is one underlying that is profitable and logical to continuously roll bought puts on, but it isn't SPY.


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## peterk (May 16, 2010)

janus10 said:


> This is a really good question IMO and *you seem quite a bit more knowledgeable about options than you let on.
> *
> This is just off the top of my head, but what type of account will you be using? Obviously *a margin account gives you additional flexibility.*


Oh I sure don't think so! I barely understand the lingo used in CMF options threads. :stupid: I have no interest in "trading options" at this point, just buying a simple lonesome protective put on the index.
Yes it is a margin account at IB, but I have never used margin nor do I currently intend to.


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## lonewolf :) (Sep 13, 2016)

Could sell far out of money call use money to buy far out of money put while holding the underlying


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## peterk (May 16, 2010)

lonewolf :) said:


> & or buy leap puts


I thought of this, but this costs a LOT of upfront money, and is essentially a 2-4x leveraged bet against the market. It goes against my belief that "it's harder to pick a market top than a bottom". I'd seriously consider LEAP calls after a 30% market crash though... Instead of buying LEAP puts I think I'd rather just invest less in the markets.



Argonaut said:


> I think if you're worried about risk, *less equity exposure would be preferential *to hedging with puts. In my personal line of thinking, puts are a tool to profit from* a rapid decline as you see it happening*. If you're constantly buying them as insurance you're just going to get killed by time decay. If I was you I'd keep more cash instead to sleep better at night.
> 
> There is one underlying that is profitable and logical to continuously roll bought puts on, *but it isn't SPY*.


Thing is I already have way too much cash, well over $100k, and want to deploy some, but the timing is bad...

It is my understanding that IV would spike at the beginning of a rapid decline, and put prices with it? One could probably buy 6 x 2month contracts over a whole year for the same price as 1 contract after a 5% meltdown and IV spike, no?

I thought of SPY because when I looked at the options contracts for big DOW companies they were always way more expensive than SPY, and SPY options have big volume. Are there better vehicles though that I'm unaware of?


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## Argonaut (Dec 7, 2010)

You're right that SPY has great options, they are the most liquid in the world. But from a strategic sense I can't envision having constant protection via puts on them is a good strategy. In the long run, markets go up and options decay. 

The other underlying I'm being annoyingly vague about would be a different strategy altogether. I won't say what it is because I haven't employed and tested the strategy yet.


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## peterk (May 16, 2010)

lonewolf :) said:


> Could sell far out of money call use money to buy far out of money put while holding the underlying


Yes this is an interesting idea. But 1) it looks like the OTM puts cost way way more than the opposite OTM calls, so the reduction in cost is minimal, and 2) Then I'm stuck buying and holding 100 shares of SPY to cover the call. I'd rather not buy SPY, not that much anyways. The 20-30k I want to invest I'd like to deploy over a small selection of quality companies that I think are undervalued and will weather a downturn better than the index.


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## peterk (May 16, 2010)

Argonaut said:


> But from a strategic sense I can't envision having constant protection via puts on them is a good strategy. In the long run, markets go up and options decay.


Yes I agree. Holding puts forever, decades, is probably a terrible idea. Now, at these market highs though, after a run-up for 8 years since the last crash... I just get the feeling there is a good chance that there will be a 20%+ market decline within the next 3 years...


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## peterk (May 16, 2010)

Time Value question:

I think I hear on the forum people saying "Time value decays faster the closer to expiration you get". Did I hear that correctly?

Example, (underlying price and IV unchanged):

Buy SPY 195 Put

1/20/17 - 11/25/16 - 8 weeks total holding period. Cost $(1.17-0.08) = $1.09

or

3/31/17 - 12/09/16 - 16 weeks total holding period. Cost $(3.20-0.25) = $2.95

It seems to me that buying closer-to-expiry puts and rolling over more frequently is lower cost than buying a further out in time put. *i.e. 2 short contracts is cheaper than 1 contract twice as long.* No? Am I doing this right?


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## Rusty O'Toole (Feb 1, 2012)

Just use a stoploss. Options cost too much for what you want and don't give the protection.


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## atrp2biz (Sep 22, 2010)

peterk said:


> Time Value question:
> 
> I think I hear on the forum people saying "Time value decays faster the closer to expiration you get". Did I hear that correctly?
> 
> ...


Time decay is not linear. Most brokerages show Greeks which can tell you a lot about the characteristics of options. Theta represents the decay of the option price over a 24 hour period all else equal. So an option worth $2.000 and a theta of 0.03 will be worth $1.97 all else equal. Theta of shorter term options > theta of longer term options.

Buying and rolling puts is not a good long term strategy. I would just reduce size instead.


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## humble_pie (Jun 7, 2009)

.

the forum has had this conversation a number of times in the past, ie how to protect portfolio downside with puts.

& all conversations have wound up at exactly the same place, ie Don't Do This.

it's too expensive, as pointed out upthread.

nor is the idea that one can hedge an entire portfolio by repeatedly buying SPY puts particularly efficient, when one remembers that the option premium one is buying must, inevitably, decay to zero, while stock markets over a historical lifetime have always risen.

what to do?

Rusty says employ stop-losses & this is a good idea, although its drawback is that it can force investors out of volatile markets prematurely & for imprecise, minor reasons.

another strategy to consider is one i practice myself for certain stocks. Instead of buying the stock, sell its OTM puts. Because (long stock minus short call) = short put.

there are enormous pitfalls, especially for a new option trader. OTM puts will always look like adorable baby puppies. Especially nowadays when their premiums are so high, selling puts looks like easy free money with no strings attached.

however, it takes work to raise & feed & train & clean up after those puppies.

some tips on puppy raising later, if you'd like.

.


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## lonewolf :) (Sep 13, 2016)

Just like weather scientists study tornadoes to obtain DNA markers when they will occur. If you want to protect your portfolio from market crashes study the crashes data mine DNA markers that are present @ market crashes i.e., price patterns, cycles, sentiment what ever.

Should also study how put prices react to the price pattern of falling prices understand which puts to buy & when to sell. For instance the top of a wave 2 rally is a better place to buy out of money puts then @ market top tick.

If DNA markers are not present for a crash the statistics indicate not to speculate on a crash or use money that will be lost hedging, Based on the size of the fractal you want to play with use puts that best suit the size of the fractal.

Look to people who have made money in market crashes if possible learn from them.

Game plan as well as forming game plan must suit your personality & based on history would have given you an edge if not do not use it.

When I look @ the chart of the DJI I see one mother of a bear market coming though first must complete the 5th of 5th of the 5th waves up of multiple degrees of trend first as the price pattern is fractal. Then wait for confirmation of the first 5 down then look to short near the top of an ABC rally & cover near max momentum down in wave 3 with out of the money puts

A total different strategy would to use market linked deferred annuities that only participate on up side do not decline when market declines or market linked GICs with downside protection there are pros & cons on these methods also.


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## londoncalling (Sep 17, 2011)

humble_pie said:


> .
> 
> the forum has had this conversation a number of times in the past, ie how to protect portfolio downside with puts.
> 
> ...


I know there a many option plays but selling puts has always interested me as the one for me. How can this strategy be used for those who don't mind being assigned?


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## humble_pie (Jun 7, 2009)

londoncalling said:


> I know there a many option plays but selling puts has always interested me as the one for me. How can this strategy be used for those who don't mind being assigned?



london i just dropped in here now to post a modest tribute to Leonard Cohen in another thread

but i'll be back with some scribbled hints about raising puppies

notice that the strategy i'm talking about involves buying no stocks. It involves only the selling of puts. Everything depends upon how well one has got the general trend of the market. In other words, if one is expecting a gigantic crash, then selling puts is the worse, worser, worst thing one can possibly do .:frog: 

.


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## peterk (May 16, 2010)

humble_pie said:


> .
> 
> the forum has had this conversation a number of times in the past, ie how to protect portfolio downside with puts.
> 
> ...


I don't think a stop loss is what I'm looking for. If anything I'm more inclined to buy after a 10% decline than sell. The thought behind the put is *so* I can remain comfortably invested after a scary decline and not panic sell, because if it gets worse the put has got me covered.

I'm not sure selling puts is what I'm looking at either. Like you said below, I'm not expecting a giant crash, but I'm weary of one. What does "minus" mean in this context HP? "Long stock _minus_ short call = short put"

What about a (long other stocks but not SPY specifically) slightly OTM short call spread, with a long OTM put for a net cost of 0? That'd get me what I'm looking for! Sounds complicated....

Example:

SPY = 216.00

Jan 2017 expiry:

Sell 220 call - $2.60
Buy 223 call - ($1.40)
Buy 195 put - ($1.17)
Net ----------$0.03


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## humble_pie (Jun 7, 2009)

peterk said:


> Example:
> 
> SPY = 216.00
> 
> ...



yikes
you've got a potential $3 debit risk built in there, who cares about the long put?

(sorry) each: (i can't resist) each: (very sorry) each: (but you're a strong laddie so i know you'll stay grounded)


ok:

- stop-loss won't fly
- buying puts for individual stocks is too expensive
- buying an omnibus SPY put is counter to the religion

what to do?

well, one could sell plain puts, as i mentioned. By coincidence, i've just posted about such a case in AAPL puts in a nearby thread.

_EDIT: here's the post with an example of naked selling short puts in AAPL:

http://canadianmoneyforum.com/showt...above-strike?p=1343745&viewfull=1#post1343745_


AAPL is a stock i've never owned, for various reasons. Nevertheless i'm happy to participate in apple's progress via OTM puts with low probability of assignment. It's less than one hour's work per annum. It costs me nothing, not a penny. It pays $1500-3000 USD per annum.

perhaps engineers in fort Mac earn much better? but me, i'm content with my $2985 pittance in apple puts.


PS one could write (long stock-short call) = short put
or (long stock less short call) = short put

keep in mind that the above often-repeated formula is for ATM puts & calls. OTM puts will be less profitable. Still, $2985 for 5 short DOTM puts in AAPL is nothing to be sneezed at.

.


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## humble_pie (Jun 7, 2009)

londoncalling said:


> I know there a many option plays but selling puts has always interested me as the one for me. How can this strategy be used for those who don't mind being assigned?




london it's not quite clear to me from your post, but it appears you might be thinking of selling puts with a strike price below the market price of a stock you are interested in purchasing.

this is a popular approach, one that's widely practiced.


here are 3 common put strategies:

1) the above approach, ie sell puts with strikes below market in order to acquire stock at a lower price.

you've noticed that if the price of the stock rises, the investor will not acquire the stock though?

this outcome is less harsh than it sounds. Investor can keep on selling OTM puts. The proceeds will more or less track the return from the stock itself (notice, though, that in a rising market the put seller would have to keep adjusting his strike price upwards, each time he goes to sell, in order to approximate the return from the stock itself.)

2) i also sell puts, but my goal is different. My goal is to harvest premium but never to acquire the stock. So the approach is different. The puts i sell have strikes that are much farther out-of-the-money (OTM) than those that would be sold by a party interested in acquiring the stock.

it's the selling of naked short puts with no intention of acquiring the stock that i was comparing to irresistibly appealing baby puppies. Such lovely free money at zero cost. But the puppies have to be trained & cared for very carefully, otherwise they can get into trouble.

3) yet another put strategy would be a pair of puts. For example, sell a 22 put, buy a 20 put, for a net credit. One's risk is limited to $2. This is a mildly bullish strategy.

_edit correction - in example (3) one's risk is limited to $2 less the credit spread premium received.
_


london which type of put selling were you considering?


.


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## londoncalling (Sep 17, 2011)

Thanks HP. Both strategies 1 and 2 appeal to me. 

1) It seems that if I getting paid to purchase a stock at a certain price is better than placing an order for a stock at the same price. I guess it would come down to crunching the numbers to ensure the premium outweighs the cost of contracts plus tying up cash that could be used elsewhere. I am unsure of where markets are headed but my guess is eventually up. Determining the path it takes getting there is the tricky part. Obviously price, premium, time and desire to be assigned would all be factors with this strategy. For those of you that use this strategy could you please weigh in on what to look for?

2) This strategy appeals to me as well. The opportunity to get return on my cash position is great. As far as stock selection for selling puts for strategy 2 one should lean towards large volume, mega caps, on the NYSE (Montreal is too tricky)? I will be going back over the options threads here to see if I can reacquaint myself with options strategies. For me this strategy may need to wait as my work often prevents me from monitoring market activity. I certainly would not have time to train a "puppy". I may head back to using a practice account. It's not the same as having your own puppy but dog sitting for a friend can still be rewarding.

Cheers


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## humble_pie (Jun 7, 2009)

londoncalling said:


> 1) It seems that if I getting paid to purchase a stock at a certain price is better than placing an order for a stock at the same price. I guess it would come down to crunching the numbers to ensure the premium outweighs the cost of contracts plus tying up cash that could be used elsewhere.


may i interject here that you have not got this puppy quite right yet.

when one sells a put one receives the cash. One goes cash-positive on the transaction. One does tie up margin to a certain extent, but in your case i'm thinking that this would not be an issue because a) you have adequate margin, & b) imho you are not one who would ever work an option rashly or wildly or riskily.

notice that tieing up some margin does not mean that one is borrowing on margin. I have margin that is always somewhat encumbered by short option positions, but i still have ample unused margin & then some. I have never paid a margin interest charge in my life & probably never will.





> I am unsure of where markets are headed but my guess is eventually up. Determining the path it takes getting there is the tricky part. Obviously price, premium, time and desire to be assigned would all be factors with this strategy. For those of you that use this strategy could you please weigh in on what to look for?


we could discuss a live example as an illustration when markets open tomorrow. Not execute it, just discuss it.





> 2) This strategy appeals to me as well. The opportunity to get return on my cash position is great. As far as stock selection for selling puts for strategy 2 one should lean towards large volume, mega caps, on the NYSE (Montreal is too tricky)? I will be going back over the options threads here to see if I can reacquaint myself with options strategies. For me this strategy may need to wait as my work often prevents me from monitoring market activity. I certainly would not have time to train a "puppy". I may head back to using a practice account. It's not the same as having your own puppy but dog sitting for a friend can still be rewarding.



see how your prudent instincts are keeping you on the right track here? knowing that work interferes with one's ability to train the puppies may mean that puppies should be a project for the future. Or that dog sitting via a practice account might be a good plan for now.

a while ago GOB had a 2nd thread where he was discussing his put selling in AAPL. It was his 2nd thread, his first one a few years had been a lot of fun for all of us who joined but in the end - as AAPL crashed from $700 to $400 - GOB's first put attempts turned into disaster.

his 2nd put thread went well. The gobster was selling weekly AAPL puts - very high risk - but he had learned to peer ahead & jump out of harm's way as quickly as possible. Another thing that worked for gobster - who also had a busy career job - is that he was always doing AAPL options. There was only one underlying stock to monitor. This knowledge saves a great deal of time.

still, i would be happy if you would put strategy (2) on the back burner for the time being. It's always my hope that new option traders will start out small & modest, since i'm aware how much knowledge is gained from experience. One option trade can teach as much as several books.

.


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## londoncalling (Sep 17, 2011)

Thanks HP. As you may recall I have been keen on options for quite sometime (years in fact). It is indeed my time constraints that have held me back and that is fine. I certainly do appreciate your help in this thread as well as previous. I can see how margin like money can be a tool. That tool can work for or against its wielder. I look forward to checking in on tomorrow's discussion. I also remember GOB's options thread from days gone by. I will have to go back and reread this evening. For now the beauty of unseasonable weather beckons me to enjoy the last days of fall. 

Much appreciated

Cheers


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## humble_pie (Jun 7, 2009)

londoncalling said:


> I look forward to checking in on tomorrow's discussion.



wondering how you are doing, would you have any puts-to-sell candidates under review?

me i have been dithering to sell puts in BCE & AAPL for quite a long time now but have not taken action yet as the underlyings keep falling. Obviously when one believes stocks have farther to fall, one does not rush out to sell puts.

meanwhile the potential proceeds of the strike/series i've been monitoring have risen to the point where i'm beginning to look at the next lower strike increments. They will pay less but with less risk. 

.


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## londoncalling (Sep 17, 2011)

My apologies. My work has been ridiculous the past few days (16 hr days) I would like to own or add to the following Caterpillar (CAT), MacDonald's (MCD), Chevron (CVX), Potash (POT), AT&T (T), CSX Corp (CSX), General Electric (GE), 3M|(MMM) and a US bank possibly (BAC). Now these stocks may or may not be good picks to purchase out right, but let's cast that aside. I am not sure if any, or why, these picks would make good options plays. I checked a few options and would guess going out to Mar or June of 2017 would be a reasonable time frame to sell puts. Perhaps I should consider leaps instead. Going further out may give me a better premium, increase probability of being assigned,(to which I am indifferent) as well as reduce cost of contracts. Just throwing out my neophyte understanding. I invite you all to point out the fallacies in my thinking.

Cheers


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## lonewolf :) (Sep 13, 2016)

Price is everything, look to price


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## Rusty O'Toole (Feb 1, 2012)

One of the most important things in option trading is the ability to get in and out when you want to without paying a big premium. For that reason I prefer to deal in American stocks and American markets, in the most active ETFs and stocks.

Look at the bid/ask spread. In the most active it will be 5 cents or less. I don't like to go over 10 - 15 cents. You can also check the volume and open interest.


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## Nerd Investor (Nov 3, 2015)

One strategy I've heard floated around for someone who wants to hedge in a margin account would be to buy a number of long dated puts and sell a smaller number of short dated puts (and keep rolling and doing this) to offset the cost of the hedge such that the short puts gradually pay for some or all of your hedge. 

For example if you want to invest about $40K in US equity exposure and want to be fully hedged, you might buy 4 put contracts of slightly OTM puts expiring in a year, then sell 2 put contracts at the same strike expiring in a week (or maybe two weeks). When the weekly puts expire you write new weekly puts. The idea is you're taking advantage of the quicker time decay to lower the cost of the options. 2 of your long puts are helping "protect" your short puts from moving against you and the remaining 2 give you your portfolio hedge.

_Much_ cleaner in theory than practice and you could probably work with the ratios to make it more suitable but it's an idea.


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## humble_pie (Jun 7, 2009)

Rusty O'Toole said:


> One of the most important things in option trading is the ability to get in and out when you want to without paying a big premium. For that reason I prefer to deal in American stocks and American markets, in the most active ETFs and stocks.
> 
> Look at the bid/ask spread. In the most active it will be 5 cents or less. I don't like to go over 10 - 15 cents. You can also check the volume and open interest.




re US options. Most on london's list above are US stocks, they willl have US options. 

in addition, thousands of canadian stocks are interlisted, ie they trade US markets as well as toronto. In some cases, for example the Potash that london is eyeing, the primary market for the stock itself in terms of volume is US market. It's always a good idea to compare volume in both canadian & US markets for interlisted stocks.

not all interlisted stocks have options, but those that do will often have far more active US options than canadian. Potash is a good example of this, also teck, goldcorp, barrick, CNQ & others. Check option "open interest" figures to see how many players are active in each country. Avoid the less active market (usually canada.)


re bid/ask spreads. In heavily traded US options there will not be any significant spread, save sometimes in the LEAPs options.

me i am never put off by a big B/A. I'm OK at coaxing out what i believe is a decent price for myself, although this is an art practiced by fewer & fewer (Rusty doesn't bother to do this, it seems) (but i bother) (the successes can be flabbergasting, as counterparties suddenly cave to half their posted prices & grant me the price i'm seeking)


re open interest. This data is far more important to me than B/A spreads. I avoid all illiquid classes & series. The positions might be OK to put on, but rolling them will be extremely difficult, therefore best to avoid these candidates in the first place.


london it looks as if you are setting up a complete diversified US portfolio. Might i ask why at least some of this is not in your RRSP account? for tax reasons on the dividends? and if any of your listed securities are in RRSP, you will not be allowed to sell puts anyhow. This won't be your broker's ruling, it's what the minister of finance has decreed.


.


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## humble_pie (Jun 7, 2009)

Nerd Investor said:


> One strategy I've heard floated around for someone who wants to hedge in a margin account would be to buy a number of long dated puts and sell a smaller number of short dated puts (and keep rolling and doing this) to offset the cost of the hedge such that the short puts gradually pay for some or all of your hedge.
> 
> For example if you want to invest about $40K in US equity exposure and want to be fully hedged, you might buy 4 put contracts of slightly OTM puts expiring in a year, then sell 2 put contracts at the same strike expiring in a week (or maybe two weeks). When the weekly puts expire you write new weekly puts. The idea is you're taking advantage of the quicker time decay to lower the cost of the options. 2 of your long puts are helping "protect" your short puts from moving against you and the remaining 2 give you your portfolio hedge.
> 
> _Much_ cleaner in theory than practice and you could probably work with the ratios to make it more suitable but it's an idea.




i do this all the time, mostly call spreads & always in US or interlisted stocks. Mine are diagonal spreads, but another version is a calendar spread (for various reasons i much prefer diagonals.) The purpose is not to hedge but to hold a diversified US portfolio in proxy form.

you can see atrp2biz doing this in his diary blog, but his timeline is ultrafast & his goal is to capture volatility. Mine is ultraslow, as befits a poor dumb biscuit, & my goal is to capture capital gains.

usually my long leg is a LEAPs option, so i can repeatedly sell short options against the long & run the pair for a couple of years.

_au fond_, a diagonal or calendar call spread works like a buy/write, except that the long leg in the option strategy is an option instead of the stock itself. This increases both risk & possible return.

another benefit to me has been the avoidance of US dividends in non-registered account, since these are unfavourably taxed. Dividends are somewhat transmogrified in option premiums, although not perfectly.

.


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## humble_pie (Jun 7, 2009)

in case any non-options traders are browsing this thread out of curiosity ...

the thread started with a simple question about one option strategy only. Should he buy puts to protect stock he was contemplating purchasing, the OP asked.

but by now the thread has wandered all over the map, mostly embracing put-selling strategies instead of put-buying strategies. Sorry about the wandering. Anyone starting out with options who feels confused, please be assured that this is normal. Options are a steep learning curve, so it's inevitable that confusion will reign for a while.

a good thing for an option newcomer to do is remain extremely careful. The broker is going to limit the newcomer to simple strategies anyhow. IMHO an excellent learning modality is to set up & execute one very small simple trade, then carefully observe everything that happens after that.

.


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## Rusty O'Toole (Feb 1, 2012)

"me i am never put off by a big B/A. I'm OK at coaxing out what i believe is a decent price for myself, although this is an art practiced by fewer & fewer (Rusty doesn't bother to do this, it seems) (but i bother) (the successes can be flabbergasting, as counterparties suddenly cave to half their posted prices & grant me the price i'm seeking)"


Not quite true. Just this morning I closed out a trade in UVXY. I sold the 23Dec 23 28 call spread 10 times for $1 two weeks ago. This morning it was mid price 23/45 natural. I put in a bid of .18 and got it. So that means a profit of $820 and happy to get it. I put in similar bids every day this week, this one got hit. 

In this case I sold the spread before the election when volatility was high and the UVXY was 23. Now it is low and I don't expect it to pop up for some time but if I can collect 80% of max profit I grab it. So, I could afford to put in a low bid and let it sit there.

Most of the time you can't do that because the market moves too fast. If you are in a bad position and want to get out you have to take what you can get, and paying an extra $100 $200 or more is the price you pay for dabbling in an illiquid position. The bid/ask spread and the commissions add up to more than you might think, enough to turn a winning year into a losing year for most people.

In Humble Pie's case this may not mean so much since she sells way out of the money options and doesn't plan on ever buying them back. But I wonder what she does when the market goes nuts and a position goes against her. About the only thing to do, would be to sit there and take it like a little soldier and hope the winning trades make up for the losers. This may be a good strategy, if you have enough winners.

By the way UVXY is a good example of not liquid enough to trade. Its bid/ask spreads are at the limit of acceptable. The only reason I trade it, is because it is predictable if you sell calls when it is sky high and it will give you some fast action. Every few months you get the chance to sell some very expensive calls and wait for a volatility collapse.


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## lonewolf :) (Sep 13, 2016)

Often the best trades are when there is huge spread between bid & ask or even no bid @ all i.e., right before a market crash everyone on long side of market no one wants to be long puts far out of the money even on the SPX or SPY these can be real money makers. Though constantly buying them when the time is not ripe is a way to lose money.


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## humble_pie (Jun 7, 2009)

Nerd Investor said:


> One strategy I've heard floated around for someone who wants to hedge in a margin account would be to buy a number of long dated puts and sell a smaller number of short dated puts (and keep rolling and doing this) to offset the cost of the hedge such that the short puts gradually pay for some or all of your hedge.
> 
> For example if you want to invest about $40K in US equity exposure and want to be fully hedged, you might buy 4 put contracts of slightly OTM puts expiring in a year, then sell 2 put contracts at the same strike expiring in a week (or maybe two weeks). When the weekly puts expire you write new weekly puts. The idea is you're taking advantage of the quicker time decay to lower the cost of the options. 2 of your long puts are helping "protect" your short puts from moving against you and the remaining 2 give you your portfolio hedge.
> 
> _Much_ cleaner in theory than practice and you could probably work with the ratios to make it more suitable but it's an idea.




NI i've had an opportunity to review your post & think it's a nifty idea, although there might be an achilles' heel within, as often turns out with option strategies (imho the heel in this one would be the high cost of buying double the number of long puts)

in your example, things will only work if investor buys no more than 200 shares of the underlying stock. These will be hedged by the extra 2 long puts in the inventory of 4 that he also buys.

the rule could go: Buy twice as many puts as lots of underlying shares .

the additional long puts not being used to hedge the shares are tied up to cover the rolling short puts that keep getting sold in a classic diagonal or calendar spread.

will the premiums from rolling only half the number of short puts be enough to offset the high cost of buying double the long puts?

it's actually an intriguing concept, thankx so much for bringing it up. Time for us all to start observing .each:


.


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## peterk (May 16, 2010)

humble_pie said:


> in case any non-options traders are browsing this thread out of curiosity ...
> 
> the thread started with a simple question about one option strategy only. Should he buy puts to protect stock he was contemplating purchasing, the OP asked.
> 
> ...


Thanks for the mention HP. Like you said, I am just looking for a simple strategy to assuage my nerves regarding investing more in the markets. I calculated I could do this at a cost of about 3%/a while creating a barrier that would cap my losses at only 10% (13% I guess) during a market crash. I don't think that I'm ready or able to manage multiple options spreads, diagonals, etc.

From what I've gathered though it seems that unless one is purely intent on a neutral strategy, and selling only to collect premiums from time decay, there is always some directionality prediction going on when one is buying/selling options. Whether it's short term speculation based on whatever news/feelings one has, or long term speculation banking on progress marching forwards and eventual price appreciation with your DITM leap calls.

I'm still thinking about buying the put... It's a simple one-leg directional play that I can understand how it reacts to market changes, and I understand the cost. Selling covered calls may also align with my nervous bearishness, but that has a distinct "betting against yourself" feeling to me. Anything else seems too complicated to me and I'm not ready for the time commitment. My access to the markets during business hours is limited to through my cellphone and during coffee breaks.


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## humble_pie (Jun 7, 2009)

peterk said:


> Thanks for the mention HP. Like you said, I am just looking for a simple strategy to assuage my nerves regarding investing more in the markets. I calculated I could do this at a cost of about 3%/a while creating a barrier that would cap my losses at only 10% (13% I guess) during a market crash. I don't think that I'm ready or able to manage multiple options spreads, diagonals, etc.
> 
> From what I've gathered though it seems that unless one is purely intent on a neutral strategy, and selling only to collect premiums from time decay, there is always some directionality prediction going on when one is buying/selling options. Whether it's short term speculation based on whatever news/feelings one has, or long term speculation banking on progress marching forwards and eventual price appreciation with your DITM leap calls.
> 
> I'm still thinking about buying the put... It's a simple one-leg directional play that I can understand how it reacts to market changes, and I understand the cost. Selling covered calls may also align with my nervous bearishness, but that has a distinct "betting against yourself" feeling to me. Anything else seems too complicated to me and I'm not ready for the time commitment. My access to the markets during business hours is limited to through my cellphone and during coffee breaks.




i've run out of time for the mo & have to leave now, but would like to say that all your initial thoughts & setup look good to me. As do london's.

both of you have taken the care & the time to learn basic options 101, you are both mindful of your busy career time demands, you are both looking to *not* make mistakes. This is an excellent starter position.

might i mention one last thing in parting. A tiny microposition as a first effort is an excellent idea. Nothing will teach as well as the actual experience itself.

just upthread NI is talking about 200 shares. These would involve 2 option contracts. This is a fine small size to start with imho. Enough to demonstrate, not enough to hurt, no matter what happens.

.


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## Rusty O'Toole (Feb 1, 2012)

The only thing wrong with the rolling put calendar is, what do you do if the market goes up? You could lose on the bought option, try to make it up by selling premium but find there is no premium to sell.

Of course if this is a hedge you make it up on the profit from your long stock. On the other hand, if the market goes down you don't have the full protection of the put because you sold it. And a close in put can gain in value faster than a farther out put if the market gets hairy.


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## Rusty O'Toole (Feb 1, 2012)

How about this. Figure out your max pain threshold and buy a put that far OTM. Get one that is good for 2 or 3 months. Hedge half your position. See what happens. You will probably find you were worried over nothing.


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## lonewolf :) (Sep 13, 2016)

might only want to buy puts when they are not expensive. When puts become to expensive to insure portfolio maybe don't use them. When puts are not expensive no one is looking for a crash this is when it s most likely to happen. When puts get real expensive in a middle or near the end of a crash it is to late to buy them.

If you do buy puts to insure portfolio what would be your rules for when to sell them ?


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## Rusty O'Toole (Feb 1, 2012)

If you buy puts for insurance you never sell them. No more than you cash in your life insurance if you feel good. I would expect the OP would buy a cheap put and watch it expire worthless. Maybe see that happen 1, 2 or 3 times and figure out it was a waste of money. Then next time put in a stoploss until that gets hit for a big loss and finally just watch the market and get out when the moving averages cross.


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## Rusty O'Toole (Feb 1, 2012)

If you have nerves of steel and a long term investment outlook you could sell OTM puts and calls against it, figuring to make a few hundred extra bucks every month but knowing that once a year or so you will be called on to either buy more stock cheap or sell some of yours dear. I'm thinking of gauging this by Bollinger bands but have not tried it.


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## peterk (May 16, 2010)

lonewolf :) said:


> If you do buy puts to insure portfolio what would be your rules for when to sell them ?


Thanks for the questions . I'm not sure yet, trying to hash that out.

Was thinking about buying 10 week puts, and if the market goes no-where, selling at 2 weeks remaining and rolling forward for another 10 weeks. 

If the market goes up >5%, perhaps sell earlier, and roll up (keeping the 10% decline hedge). 

If the market goes down >5%... I haven't figured this one out yet, it's the tricky scenario. Should I 1)

-keep the put and let it go ITM (perhaps DITM), and hold till 2 weeks remaining, then rolling down to 10% below?

Or 2)

-Roll out and down early, when I'm still slightly OTM or ATM, in anticipation of further decline... 

I guess this decision will depend on how much time remains in the contract when the decline starts, and how I feel about the decline being the start of something bigger, # 2 being the more aggressive (bearish) scenario.

Either way, I'll have to keep some long put for the duration (30%+ decline), and commit to not selling until that point, otherwise the whole idea is pointless, it would like cancelling the insurance for your Caribbean beach house at the start of hurricane season...


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## peterk (May 16, 2010)

Rusty O'Toole said:


> If you buy puts for insurance you never sell them. No more than you cash in your life insurance if you feel good. I would expect the OP would buy a cheap put and watch it expire worthless. Maybe see that happen 1, 2 or 3 times and figure out it was a waste of money. Then next time put in a stoploss until that gets hit for a big loss and finally just watch the market and get out when the moving averages cross.


I'd tend to agree, it might be what happens! :hopelessness: I don't like the stop loss idea though, it's throwing around way too much money, 10s of thousands, on big bets about whether the market will keep going down or bounce. Then my life is a hellish ball of stress as I spend the next weeks bemoaning whether the decision was the right one or not...

I like the put idea mainly because I can keep the portfolio intact without having to make that big decision with a ton of money, and instead just spending $100 every 2 months for the put insurance and peace of mind.

To be clear, this is not a decades long perma-bear strategy I've got in mind, I wouldn't be doing it normally and forever, I know the most likely scenario is I'm throwing money away... But S&P500 is at all time highs, and we've had an 8 year bull market, and Trump is in the white house, and EU may be on the cusp of breakdown, and I've got *too much cash!* What's a guy to do?


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## peterk (May 16, 2010)

humble_pie said:


> another benefit to me has been the avoidance of US dividends in non-registered account, since these are unfavourably taxed. Dividends are somewhat transmogrified in option premiums, although not perfectly.
> 
> .


Neat-o. So say you're buying a DITM 2-year call for a $100 stock. If the stock paid no dividend the call would cost $50, but since the stock pays a $4/year dividend, your call can be purchased for a $42 premium instead. When you sell the call at expiration for $50 (all else being equal) you pay 25% for a capital gain on $800, instead of 50% for two years of US corporation dividend income of $800 by holding the stock. Furthermore you only have to pay the cap. gain tax at the end of year two, instead of year one and year two for the dividend.

Even if the relationship is not exact, and you have to purchase the call for $44, then you have a $600 capital gain with a net $450, instead of a $800 foreign dividend payment for a net of $400.


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## lonewolf :) (Sep 13, 2016)

SPY closed 218.99

Dec 2018 100call ask 119.56 close ask price

100 + 119.56 = 219.56
219.56 - 218.99 = .57 of premium

Hold spy put for about a year or year & half then sell. Market goes no where there is almost no premium for time to eat away only $.57 Market goes higher option pretty well has to move higher point for point.

Market declines or crashes premium will expand as spy gets closer to 100 as intrinsic value decreases. Giving the spy call a positive curvature loses less money point for point when market moves against long position as market gets closer to strike price 100 & gaining point for point on up side.

About 50% less money on the table less risk. Buy same amount as you would if buying the underlying.

Easy simple don't have to worry hedging with puts.

When you do the math this is a very good strategy.


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## lonewolf :) (Sep 13, 2016)

peterk said:


> Thanks for the questions . I'm not sure yet, trying to hash that out.
> 
> Was thinking about buying 10 week puts, and if the market goes no
> 
> ...


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## lonewolf :) (Sep 13, 2016)

Put premiums can drop very fast during a rally after a sudden market drop as the level of fear decreases.


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## peterk (May 16, 2010)

lonewolf :) said:


> SPY closed 218.99
> 
> Dec 2018 100call ask 119.56 close ask price
> 
> ...


Ok. So I have $21,899. Spend $11,956 on the 100 Call, $9,944 left in cash.

Downside: 1 year later the SPY price has plummeted to $100, the call is worth ~$6 with 1yr of time value left. Sell the call for $600, and am left with cash+1% interest + $600 for a total of $10,643. Vs $10,000 for 100 shares SPY.

Upside: SPY goes to $300, Call goes deeper ITM, is worth ~$200. Total $30,043 vs $30,000 for 100 shares SPY.

I like it... What's the catch? I don't get it. Why would anyone ever buy stock?? :cool2:


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## Rusty O'Toole (Feb 1, 2012)

With stock you get a dividend of 4% more or less which is about $875 in your example. So it is pretty much a wash.


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## lonewolf :) (Sep 13, 2016)

SLV or GLD can use it on also. Sometimes when premiums are high deep in the money might still have to much premium to use.

Rusty could take money not invested since less on table invest in GIC or even a deferred annuity with interest & death credits would grow more then dividends. The stock index ETFs seam to have less premium in the deep in the money leaps then do individual stocks.

I dint think a lot of people use the strategy because they don't know about it more used by the professional little guy is usually to greedy & buys out of the money. Which most of the time should not be purchased unless looking a 3rd wave to unfold after completion of wave 2. (Elliott wave)


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## peterk (May 16, 2010)

Damn, dividends, of course. But as discussed above, American dividends are evil for taxes.


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## lonewolf :) (Sep 13, 2016)

spy dividend currently 2.02 % 
outlook financial 1.7% savings account, 2.3% 5yr GIC


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## londoncalling (Sep 17, 2011)

Lots to take in. I read through it quickly just now. Thanks to all that chimed in regarding peters put insurance strategy as well as offering up some simple(but very beneficial) advice to my query. Not to sound moronic but options do provide a lot of options for investors. I am going to digest this over the weekend as well as any further discussion here. I will start my own thread out of respect to peter and to provide clarity for those like myself trying to grasp the option game. I will answer the question HP put forth about the creation of a US dividend portfolio and RRSP. I plan to do the options in a cash account and then if assigned move them to the RRSP soon after. I have a fair bit of contribution room and believe that is allowed. Thanks again. see you on another thread.


Cheers


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## lonewolf :) (Sep 13, 2016)

Study by Arch Crawford found that 2/3 of the biggest % down days occurred on 1/3 of the Calendar which centered exactly on the fall equinox. 
This time period is more important to use put protection then @ other times.


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