Bang for the buck option throwaway hedge???

Discussion in 'Options' started by onlythebest, Dec 12, 2006.

  1. I know zippo about options....I'm a futures trader. ;)

    But a young friend has a new client who's afraid the market may drop hard in the next few months and he wants some max-leveraged options as protection. He asked me, I told him I wasn't qualified to answer.....but now I'm curious.

    Here's the assumptions:

    The money is drop, expires worthless, no problem.

    He wants to be continuously covered for 'the drop', taking his first position before week's end.

    He 'thinks' he should buy 1 month out.

    His nightmare scenario estimate is an S&P 20% drop (think he said "market" drop).

    He wants lots of leverage....risks all of it for maximum % reward.

    He wants index options of some type, not necessarily S&P.

    What should he buy????

    My takeaway is the guy wants cheap options (couple bucks down to ~.40) that he can sell for a huge percentage gain if there is a catastrophic event over the next few months. ;)

    Personally, I'd be looking at puts on individual stocks as there are a lot that would fall much more than 20% on an S&P drop of that amount......but, they want to do what he wants to do.

    I'm curious what some of you experienced options traders would suggest. I'm sure there are some type of options "calculators" out there to do this, but I wouldn't know where to look. If the market is down 20% from here on Valentine's day, what strike do you buy?....I don't know?
  2. jj90


    To answer your question simply, pretty much any index put. You can tell him to buy all S&P puts or whatever index he wants or spread them out a bit. Very simply, buy the closest month out strike depending on where he wants it, 5%, 10%, etc away from the current index value. It's a pretty straight forward answer, in the context of 'how do I protect vs market drop'. If you want more specifics, other then buy puts, a more complex question needs to be given.
  3. vetten


    hello jj

    I`m also interested to hedge my long trading stock portfolio,
    but long term, all the time at the cheapest cost.

    what would you go for right now if the portfolio is $ 500,000?

    dont know anything about options, but it seems that people are turning to options in a doomsday scenario.