A Dashing Blade
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Silent.Trader said:
Hear where you're coming from, but put yourself in the shoes of the owners of the firm . . . .
Hear where you're coming from, but put yourself in the shoes of the owners of the firm . . . .
Sorry to intrude on this Love Fest but I've got a question... I anticipate a very sharp smackdown in equities. Possibly within the next 5m. Given that volatility given by vix is relatively low What's the best way to start positioning for this - I want low risk and relatively simple. .......other than out of the money puts.
More of an investment position.
More of an investment position.
spreadrisk
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"I anticipate a very sharp smackdown in equities"
If this were to happen then the Implied Volatility (IV) would rise for major Indices.
One problem with Buying a Put (or Bearish Put Spread) position is you may not get the timing right, and the Index could have risen quite alot.
You could buy far dated Strangles/Straddles and profit on the increase in IV.
You could also Buy Calendar Spreads (sell near term option against far term options).
I'd consider doing this on either the SPX (S&P500) or ESX (FT100).
Or you may be able to buy the VIX Futures/Options.
If this were to happen then the Implied Volatility (IV) would rise for major Indices.
One problem with Buying a Put (or Bearish Put Spread) position is you may not get the timing right, and the Index could have risen quite alot.
You could buy far dated Strangles/Straddles and profit on the increase in IV.
You could also Buy Calendar Spreads (sell near term option against far term options).
I'd consider doing this on either the SPX (S&P500) or ESX (FT100).
Or you may be able to buy the VIX Futures/Options.
Hook Shot
Your alternatives for the type of strategy depend on your view with regard to volatility and what risks you are concerned about. You mention limited risk so we should rule out selling calls or similar.
You use the phrase "very sharp smackdown". I interpret this as meaning you expect a rise in volatility. I think you have 2 alternatives. Buying a put is the simplest which you probably understand and can analyse. The main alternative is called a Put Ratio Backspread. This involves selling one put and buying two (or more) lower strike puts. You are net long one put but the higher strike put which you sell has a higher price than the one you sell so can cover some or all of the cost. Your risk at expiry if the market rises above both the strike prices is limited to your net premium. You have a greater risk of loss if the price finishes between the two strikes. You gain in a similar way to a long OTM put if the market falls as you are predicting.
I would not advise a long straddle or strangle. These do not give effective risk cover for the market rising instead of falling unless you have good reason to believe that there is a possibility that the market may really explode upwards with greatly increased volatility.
If you are expecting a fall without increased volatility then you could take out a bear spread. Buy one put and sell one with a lower strike price. This is cheaper than than a long put but the potential gain is capped.
Whichever strategy you choose, the strikes and expiries you select will depend on your view of the extent of the likely fall and its timescale. The strategies above can be structured to yield dramatic potential gains in comparison to the stake required but do not blind yourself to the fact that by some margin the most likely outcome is you will lose money. Its fine if you've saved up a bit of money which you don't mind losing and could replace by saving for a few months but don't bet your house or pension on it.
Best of Luck
Your alternatives for the type of strategy depend on your view with regard to volatility and what risks you are concerned about. You mention limited risk so we should rule out selling calls or similar.
You use the phrase "very sharp smackdown". I interpret this as meaning you expect a rise in volatility. I think you have 2 alternatives. Buying a put is the simplest which you probably understand and can analyse. The main alternative is called a Put Ratio Backspread. This involves selling one put and buying two (or more) lower strike puts. You are net long one put but the higher strike put which you sell has a higher price than the one you sell so can cover some or all of the cost. Your risk at expiry if the market rises above both the strike prices is limited to your net premium. You have a greater risk of loss if the price finishes between the two strikes. You gain in a similar way to a long OTM put if the market falls as you are predicting.
I would not advise a long straddle or strangle. These do not give effective risk cover for the market rising instead of falling unless you have good reason to believe that there is a possibility that the market may really explode upwards with greatly increased volatility.
If you are expecting a fall without increased volatility then you could take out a bear spread. Buy one put and sell one with a lower strike price. This is cheaper than than a long put but the potential gain is capped.
Whichever strategy you choose, the strikes and expiries you select will depend on your view of the extent of the likely fall and its timescale. The strategies above can be structured to yield dramatic potential gains in comparison to the stake required but do not blind yourself to the fact that by some margin the most likely outcome is you will lose money. Its fine if you've saved up a bit of money which you don't mind losing and could replace by saving for a few months but don't bet your house or pension on it.
Best of Luck
Cheers Gareth, really appreciate you guys taking the time to explain alternatives - especially as the original question was a little vague.
With regard to risking capital - good point. A proportion of the profits I'm making from the rise in indices is being stashed away for a time when things go the other way - and get very hairy...probably with spike in vol. This bear fund is could of course go to money heaven but since it can be partially hedged by going/staying long index futures - hopefully the pain won't be too great.
Like many, I think the big down day is inevitable but I'm happy to hold my nose and ride the market higher - and get my bear strategy sussed in the meantime.
Cheers Again Gareth
With regard to risking capital - good point. A proportion of the profits I'm making from the rise in indices is being stashed away for a time when things go the other way - and get very hairy...probably with spike in vol. This bear fund is could of course go to money heaven but since it can be partially hedged by going/staying long index futures - hopefully the pain won't be too great.
Like many, I think the big down day is inevitable but I'm happy to hold my nose and ride the market higher - and get my bear strategy sussed in the meantime.
Cheers Again Gareth
Beware of dividing your funds and holding a long index futures position and a bear position in options at the same time. You will probaly end up with a different total exposure and will not get the results you are hoping for. For example if you hold an index futures contract and a long put contract on the index all you have done is given yourself a long call position. You have hedged your downside at a cost but not given yourself a position which is short the index overall. If you buy two put contracts you have a straddle etc.
Decide at what point you want to stop being long and want a bearish position on the market then make sure your overall position is what you expect.
Regards
Decide at what point you want to stop being long and want a bearish position on the market then make sure your overall position is what you expect.
Regards
