Best Bang for Buck; KMP

Discussion in 'Options' started by El Guapo, Nov 5, 2008.


    Its going to drop like a rock...soon...could be real soon...(I'm not going to discuss why I believe this)

    In your professional opinion, what would be the best Bang for the Buck Option Strategy?

    Buy PUTS? Which Strike?
    Yep, I'm an Option Noob.

    I know I could short it, but I believe there is more bang with an option strat.

    Many Thanks
  2. IMHO it all depends on your targets. How far do you think it will fall and over what time frame?

    If you are not sure it will fall much, use ATM or a little bit ITM. These have higher delta and, of course, higher probability of being ITM.

    If you think it will fall a lot, like 10-20%, buy puts 10% or so OTM. They shouldn't cost much, unless volatility is already pumped way up. There are also tons of spreads with wide ranges you could do too, but the simplest trade is just some puts.

    No matter what, I'd put in GTC orders to take profits after you put the trades on. At least, this always works better for me. The tendency is to get too scared or greedy and miss out. GTC profit target orders take care of that without having to watch your screen all the time.
  3. Thank you!

    I believe a drop of >20% is in order.
  4. You could also "ladder" some strikes down. Like 5%, 10%, 20% (if there are strikes that low). That way you are bound to hit some and they will help pay for the others. Just make sure to put in the sell orders (and stop loss orders might be a good idea too). Don't get (too) greedy!
  5. MTE


    I agree with Wayne.

    If you think the stock will drop to about 40 within the next 16 days then the Nov 45 puts at 0.10 bid-0.20 ask are a good play as those would go to about 5, which would be a nice return.
  6. jr07


    I am long this stock

    what is the source of your info and when is the drop expected?

  7. El Guapo,

    Wayne gives alot of good advice, but I wanted to ask a few questions and throw in some thoughts.

    First of all, just as important as bang for the buck is allocation. In other words, how much do you want to risk? It would be a mistake for example to assume a person is converative because they buy near the money puts, and then find out they put all of their money into those options. Conversly, it isn't necessarily too risky to buy farther out options if used with a small amount of one's account, or possibly hedged with other positions.

    Also, I don't mean to sound suspicious or anything, but if you had insider information that the company was about to release an earnings warning or something, it would be illegal to trade on that. Of course, you probably already know that, but I just wanted to point it out to say that assuming you don't have insider information, then how sure are you of the stock falling? And how sure can you be of the amount and the date it will fall?

    The reason I ask is that you could consider a hedge where for example you could profit on a big move down, but maybe not lose any money if you are wrong and the stock moves up, or lose less if it stays unchanged. If you fell 100% it will fall, you probably shouldn't hedge, but if you thought maybe its 75/25, then you could consider one.

    For example, a Put Ratio Back Spread or PRBS. In a PRBS you sell a higher strike put (in the money maybe) and buy more of the lower strike puts (maybe out of the money). Usually, you want to give some time for the stock to move in a PRBS.

    For an example for KMP, you could do the following based on prices I'm seeing on Yahoo for Dec expiration:

    Sell 2 - 57.5 - get $900 total
    Buy 4 - 52.5 - pay $780 total

    So, you would get $180 credit in this case and have a potential risk of $1000-180 = $820, but that would only be if KMP was exactly $52.5 at expiration. If KMP was over $57.5 at Dec Expiration, you would keep the $180 and all options would expire worthless.

    Now, the math if KMP fell to $40 by expiration:
    Short 2 57.5 - Each $1750 against you -$3500
    Long 4 52.5 - Each $1250 for you +$5000

    So, you would make $1500 in that case (plus the $180 actually). Of coure, this clearly isn't as good as the profits from just buying the Nov puts if the stock does fall to $40, but I want to stress to remember that unless you are 100% certain it will fall below whatever you choose for the strike, you could risk a 100% loss.

    With a PRBS like above, if the stock didn't move lower in time, you would generally set a date to close the position, for example, maybe 2 weeks prior to Dec expiration. Generally, a PRBS would show a loss if the stock hasn't moved much and time remaining has declined.

    One thing I have done in the past is to do a PRBS, but add extra puts as well. That way you can profit more from a down move, and maybe just breakeven or take a small loss from a move up.

    Of course, it may also be better to stick with straight put buying instead of complex positions if you are new to options trading.

    I do agree with Wayne though that if you are certain it is going down, decide when you think it will happen and buy the appropriate month options and go out the appropriate amount - Personally, I would tend to be slightly more cautious then you think maybe you should be.

    For example, if you expect it to go down to $46 before Nov expiration, I would rather buy the 50 puts then the 47.5 puts. If you are wrong and it only goes to $48, you will be much, much better off. Remember that a drop from the current price to $48 will cause a 100% loss in the 47.5 strike puts. If you expect it to go to $49, consider the 52.5 puts over the 50 puts for the same reason.

    Thanks for reading and let me know if you have any questions,

  8. Put in a Stop Loss, protect profits!
    I will not discuss why I believe this; I don't when. Proprietary research.
  9. Many thanks for the detailed info...I may just stick with a straight puts...

    I do not have analysis is purely based on research alone. Trying my hand at options, looks like a good candidate to try...
  10. Doh


    KMP has been solid as they come through this market crash never falling lower than $43/share even at the largest drop in the market (some inside trader got it at $35 but I don't think that price was ever public).

    KMP pays solid dividends. It doesen't move much and it didn't take long for it to recover to the mid $50 levels where it's been pretty solidly for the past 2 years and continues to be even now.

    If it opens today at $53 that doesen't look like a bad price to me for how robust this stock is. Wish I would have known about it and gotten in at $45 when it was in that low window breifly after the big crash. Too late now.
    #10     Nov 7, 2008