Ok, thanks guys; Deep OTM Puts it is. So, how deep and how far? That is, what strike/month? Again, looking to maximize the gain. Yep, I'm an option newb! muchos gracias
Just out of curiousity, how can you ask for such specific information when your whole thread is based on the unspecific timeframe of said unknown event?
Great question! I'll try to frame my question it better; Let say I believe the market will fall on on the 4/27, so I want to build my postion during the week of the 20th, for example. As an option newb, which month will I be looking to buy the puts? May/Jun/Jul/Aug/ Thats the how far part, as far as the deep part, whats considered deep? 10-20-40 pts away from the current? Again, forgive my option newb-ness.
How big do you think the move will be? That will in part determine how far OTM you want to go. You usually want to buy as close to the event date as possible for the biggest percentage move in the option.
You need to analyze it. If you are certain of the date the market will drop you will want to purchase DOTM puts that expire in the front month. For instance, if you bought a thousand APR 730 puts for $140K earlier today and the S&P dropped to 710 tomorrow in a dramatic sell-off, you would make over $3 million in one day ($140K worth of the 680 puts would make you over $5 million). Since those puts expire in 8 days (5 trading days), there is very little margin for error. You could buy the puts one month out and a little closer to the money to reduce your risk, and of course, your profit potential. But like some others have mentioned, if you purchased 3500 put contracts at the 680 strike a day before the S&P tanks 115 points, consider yourself under investigation.