I have a stock I know 99% will go down, what is the best way to absolutely maximize the return on margin / minimizing risk via options? Selling ATM calls? Synthetic short? I need some ideas...thanks guys
Based on how far it can go, run a sensitivity analysis on out of te money puts. The shorter dated you can get the better. That's how you will maximize return. If you have a. View on implied volitity there are other things you can do to enhance your return.
to me i think timing is everything as to what you use.. of course if was going down 50% next week.. i'd say buy penny otm puts.. if its going in the next couple months and you have a target.. i'd be doing a otm fly... i'm probably not the best to give you advice but i'm just brainstorming.. deep otm puts will give you the most leverage.. but if implieds are high already because of others looking to short then you could buy the right direction and still lose..
Given your 99% certainty, do you also have an idea what % it will drop? Over what period of time? Is the stock close to it's high, or has it already had a sig drop? When do you anticipate the drop to begin? This month? What about the other stocks in the same sector? A lot of stocks are expected to drop over the next 2 months, due to year end "window dressing". Is that part of the reason? Or did you hear something from someone who knows someone, who knows someone, who knows someone, who knew a guy who knew someone, who used to know someone, who was friends with a guy who knew someone?
Thanks for the responses The OTM put idea seems reasonable as newwurldmn and cdcaveman suggested...the puts seem to produce the best returns from all the positions I've looked at so far. Theta is the enemy here however. As for vol views, I dont have any particular view on vols, but given the traditional stock down - vol up relationship I guess I am long vol. Oh and the timeframe is several months, I expect a slow decline, don't really have any target....but certainly below this level. That's also why Im kind of worried about theta on the puts. Lastly, to put_master, I know someone who used to know someone
am I missing something here? "Several months" "slow decline"? Isn't that a textbook situation for short OTM calls? It doesn't really get any better than that. What is this stock you are so sure is going to slowly deteriorate? If you don't want to short the calls I will.
<<< Lastly, to put_master, I know someone who used to know someone >>> "used to"..... I suspected it was a "used to" type situation vs a "current". That would explain why you were only 99% sure. BTW, if Obama is re-elected, and we have "another" credit downgrade, I'm 100% sure that 99% of stocks will drop.
It's all semantics, the point is markets are full of assymetric information and I have some lemons for sale.
I would buy puts in the timeframe you are looking and consider the theta as the cost of doing business. Otherise I woud short stock and hope you are right (or at least not wrong). If your timeframe is longer, I would look at longer dated atm puts or a series of shorter dated out of the money puts. It depends on which is cheaper, but instead fo buying 1000 atm 6m puts, why not buy 200 95% 1M puts. And keep rolling it.