I don't know if I would buy back month units. If you're trying to make money from a crash - the pricing and vole increase will be fast and furious, and you'll want to leverage your premium as much as possible for price movement. I would buy OTM front month puts before back month puts. The front month <30Days will normally have most of their time premium burned out of them and they are now more priced according to event risk. The backs >30Days will probably still have some premium which is associated with time decay, but if you're crash betting, you should really be after the price movement and vol explosion, both of which will be expressed with more gusto in the front short dated month. You could do an interesting study; say only buy front month 5-7% OTM puts inside 20days (possibly when vol is in a certain range). You won't be in the market all the time, maybe 60-70%, but if you do a cost/return calc, you may find it interesting. Never done this myself, but I could see why someone may be able to develop a plan with many small losses and several large gains.
since it is quite difficult to predict how much legs the current rally has, i would be inclined to sell vertical call spreads for the time being and gradually buy deep otm puts on volatility contraction days.
But what if the crash doesn't happen in the next few weeks? What if it happens next month, or in 6 months? Buying front month puts is going to suck in an environment like 2008, where most months were moderate and then the crash took place in about 2 1/2 months. Whereas if you were long Dec puts all year, you eventually made 20 times your money.
I'd go with the par-strike SPY calendar, short Sep10, long Mar11. Hold for the quarter and reevaluate. Better than a double at the peak PNL (SPY @ 100) by Sep10 expiration, and minimal gamma. Then roll into the Dec10. It's long >$16 vega/contract at 112.00.
I am very good at making money in bull mkts, am naturally bull biased and made over 100% in 2009 (on bull side). But no good at all making money in Bears even when one. LOL. Uh huh... Thats very funny. HAHA
This is very true. It just would have been difficult to make a living for the 8 years previous. What I'm proposing is that there will be some takers in the 5-10% down range, enough so that you'll be able to have a frequency balance of winners and loser trades with proportionality in your favour.
Many good ideas, appreciate it. And need to plug them into Hoadley to check them out. In terms of what type of crash, think 800-900 by Sept quite possible. Today makes it cheaper to set it up. Any thoughts on this concept: I put in a Nov 950-800 Put Vert spread, cost about 22. Then added a Sept 30 1125 Call long 36 , Aug 20 1120 Call short 29.60 Calendar Spread, cost 6.40 (if quotes are right). It looks much better in Hoadley. Will be profit at 1150 or lower on Aug 20, in fact 6,000+ gain if 1125. +500 if 1050 then, and $15,000 profit if 900. Total gain in Nov possible is $60,000, worst possible loss if mkt goes up, is $16,700. So if if mkt goes up 7% or less a profit and big profit if drops. What do you folks think?
I would want to be short deltas within two sigmas. I see no point to a nice atm gain that evaporates 50 lower. Don't sell calendars if you want a crash, the payoff is not there.