Best option strategy for buying stockmarket panics

Discussion in 'Options' started by Cutten, Sep 23, 2007.

  1. Cutten


    Let's say you can time the low of a stockmarket panic to within 2-3 days. What's the best option strategy to trade this?
  2. Deep otm puts.
  3. Cutten


    Wouldn't this be troublesome if you were a day or two early?

    Ok, I guess 2nd question is what is the best strategy which has a limit on the risk involved.
  4. Well, you're risk is limited to your debit. A long backspread has unlimited profit potential. Risk is limited to the strike differential +debit, or strike differential -credit. Short atm/long 2 or more otm puts.

    Bear-delta long calendars work well, provided you don't invert deltas to any large degree.
  5. Calendar call spread. With VIX so high at the botton, the front month options may have higher IV (so you sell them) versus the longer term calls that you buy in a later month.

    OTM on both may work.

    Please, I'm not a daytrader, I'm an "Intraday Liquidity Provider" :p

  6. Cutten


    Ah ok, sorry I didn't make myself clear. I meant playing for a subsequent bounce i.e. that you can pick the end of the panic to within 1-3 days, but can't be 100% sure that today is going to be the final day of the move down (you might be 75% confident, say, but want to be hedged against a further crash day just in case).

    In other words, if you want to bottom-fish a stockmarket panic - you think that vol is pretty near a top, and prices are about to rebound - what's the best option approach that doesn't have unbounded risk.
  7. Ahh, misunderstood. Wide-strike long atm butterfly. No question. SPX = 1300; long the 1300/1400/1500 fly as an example.
  8. Cutten


    Ok, that makes sense. What about calendar spreads, would they be suitable in that kind of market scenario?
  9. Short calendars are excellent as well, but won't have as favorable a payoff as the fly. Long calendars will get obliterated, especially long deltas. The drop in strip vols kills upside deltas.
  10. TorontoTrader suggested long calendars and you suggested short calendars. Can you two explain the reasons?

    Will the day of the month (i.e. the beginning of the option month or close to expiration) make a difference in selecting the strategy?
    #10     Sep 23, 2007