Short $SPX

UgoDadeo

Junior member
16 0
What is the best options strategy to short the S&P500?

I would be willing to buy into the S&P around 1480.
And I would want to cover my risk at 1625 -- in case the beast runs to the moon.

But I am new to options strategies, so any ideas are appreciated.
 

wino59

Active member
126 12
What is the best options strategy to short the S&P500?

I would be willing to buy into the S&P around 1480.
And I would want to cover my risk at 1625 -- in case the beast runs to the moon.

But I am new to options strategies, so any ideas are appreciated.

Just buy a ITM put option, with a delta of 80 to 90. That is what I would do. No need to buy and cover with that strategy, plus less in commissions. The only problem is time decay, but with a high delta you will have high intrinsic value, so that will not hurt you as much as if you bought an ATM put with a delta of 50. So if the market doesn't move, or moves sideways, you would not lose as much overtime. The less delta you buy, the more time decay is working against you.

The maximum risk is what you pay for the option... so if you pay 5.60, the most you would lose is $560 per contract.
 

UgoDadeo

Junior member
16 0
Just buy a ITM put option, with a delta of 80 to 90. That is what I would do. No need to buy and cover with that strategy, plus less in commissions. The only problem is time decay, but with a high delta you will have high intrinsic value, so that will not hurt you as much as if you bought an ATM put with a delta of 50. So if the market doesn't move, or moves sideways, you would not lose as much overtime. The less delta you buy, the more time decay is working against you.

The maximum risk is what you pay for the option... so if you pay 5.60, the most you would lose is $560 per contract.

Thanks for the response. I see that my Greek is Weak.

On 04/11/2013, the $ SPX was trading around 1593.
If I understand the delta properly, the May 1620 Puts were selling for 33.80.
The delta was about 71

Today, the $ SPX is trading around 1550.
The May 1620 Puts are selling for 68.70. Buy to close the put is about 73.00
The delta is around 85

Am I reading this information correctly?

Thanks again.
 

wino59

Active member
126 12
Thanks for the response. I see that my Greek is Weak.

On 04/11/2013, the $ SPX was trading around 1593.
If I understand the delta properly, the May 1620 Puts were selling for 33.80.
The delta was about 71

Today, the $ SPX is trading around 1550.
The May 1620 Puts are selling for 68.70. Buy to close the put is about 73.00
The delta is around 85

Am I reading this information correctly?

Thanks again.

Right. Here is thing... This is why I suggested buying a high delta. If you are right on the direction the delta is going to increase it moves in your favor, up until it reaches 1.0, then you are getting a $1 for every point it moves in your favor, the beauty of it is if it moves against you, the delta goes down, so every point it moves against you, you will effectively lose less money per point move.

There are things that affect option pricing that you should be aware of like volatility, and time decay. However you asked for a simple option strategy to short, and this is as simple as it gets..

So you would have made a nice chunk of change if you bought them at 33 and then sold them back at 68 :)

Volatility will DRAMATICALLY effect option pricing... If you buy a put, and suddenly the market tanks, then rebounds the next day back to your option strike price, you could still make money, because the volatility increased, which will inflate premiums.... This is why it is not always a good idea to buy calls at the bottom of a big move... you could still lose money because the premiums are inflated, and as the market moves up, the volatility decreases as does the premium for the option, therefore you in theory would not make any money even though it went in your favor.

I didn't just arbitrarily suggest that to you... there was a good reason for suggesting buying the high delta, as you would be less likely to be hit with volatility premiums or time decay, because you are buying a lot of intrinsic value.

Hope this makes sense...
 

UgoDadeo

Junior member
16 0
Right. Here is thing... This is why I suggested buying a high delta. If you are right on the direction the delta is going to increase it moves in your favor, up until it reaches 1.0, then you are getting a $1 for every point it moves in your favor, the beauty of it is if it moves against you, the delta goes down, so every point it moves against you, you will effectively lose less money per point move.

There are things that affect option pricing that you should be aware of like volatility, and time decay. However you asked for a simple option strategy to short, and this is as simple as it gets..

So you would have made a nice chunk of change if you bought them at 33 and then sold them back at 68 :)

Volatility will DRAMATICALLY effect option pricing... If you buy a put, and suddenly the market tanks, then rebounds the next day back to your option strike price, you could still make money, because the volatility increased, which will inflate premiums.... This is why it is not always a good idea to buy calls at the bottom of a big move... you could still lose money because the premiums are inflated, and as the market moves up, the volatility decreases as does the premium for the option, therefore you in theory would not make any money even though it went in your favor.

I didn't just arbitrarily suggest that to you... there was a good reason for suggesting buying the high delta, as you would be less likely to be hit with volatility premiums or time decay, because you are buying a lot of intrinsic value.

Hope this makes sense...

You have helped tremendously. I did not understand how to use the delta to evaluate just how deep ITM to go.

Do you have any thoughts on determining how much time to buy. In other words, I looked at May Puts. Would September be better?

Thanks again for all of your help.
 

wino59

Active member
126 12
You have helped tremendously. I did not understand how to use the delta to evaluate just how deep ITM to go.

Do you have any thoughts on determining how much time to buy. In other words, I looked at May Puts. Would September be better?

Thanks again for all of your help.

This is what I do... If I am short or buying put options the moves are generanlly quick, go back and look at any chart, see how fast it sells off, and then how long it takes to come back.

Generally when I am short I buy puts 1 to 2 months out, long I may give it more room, 3 to 6 months.... Look at the run from the first of the year...Those gains took 3 months, however a sell off and correction will happen in a couple of days or weeks. You could have also cashed in and bought more the following month, but that is more in commission.
 

UgoDadeo

Junior member
16 0
This is what I do... If I am short or buying put options the moves are generanlly quick, go back and look at any chart, see how fast it sells off, and then how long it takes to come back.

Generally when I am short I buy puts 1 to 2 months out, long I may give it more room, 3 to 6 months.... Look at the run from the first of the year...Those gains took 3 months, however a sell off and correction will happen in a couple of days or weeks. You could have also cashed in and bought more the following month, but that is more in commission.

Great! Thanks exactly the idea I was looking for.

Thanks again for all of your help.
 

UgoDadeo

Junior member
16 0
If you buy an ITM Put on SPY (not $SPX index), what are the chances you get excersiced and have the security put to you? In other words, is it better to use the index rather than the ETF?

The ETF would allow a smaller position to be worked. For the 162 or 1620's one $SPX Controls 162K vs 3 SPY controlling 49K.
 
 
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