Whats best way to trade a simple down move?

Discussion in 'Options' started by spinn, Sep 9, 2006.

  1. spinn


    The dow futures are currently trading around 11500....if I think that in two months, the dow will be trading at 10950, what is the best way to trade that with options?

    I know you could buy puts....but the time premium works against you. Selling calls is good but requires more margin than I want to use.

    So...whats the best way to make this work??

    Lets not debate my call....lets just assume that on 11/15/2006 YM is at 10950.
  2. Just sell the dow with a stop at 65% retracement of 9/1 to 9/7 move. Just now at 50% of that move.
    Or wait until the 20 bar ma crosses the daily.....the fatal cross as it is often called.
  3. buy deep otm puts, strike 15% away; max profits is reached when the underlyin' is at or near the strike at exp or liquitdation.
  4. MTE



    If the option is ATM at expiry then it's worthless.
  5. If it's exactly at 10950 on 11/15/2006 then the best risk/reward you'll probably get is a 10800/10900/11000/11100 condor.That's assuming YM still has 100 point strike price intervals.

    If there are 50 point intervals for that month then the 10900/10950/11000 fly is obviously better.

    Of course, you probably didn't mean that it would be exactly at 10950 by November expiration.

    An alternative suggestion is as follows:

    If you're worried about decay on long PUT options but still want profit from some vega that would come with a down move you could look at a calendar or diagonal e.g. go long DEC 10900 PUTs but short OCT PUTs and then roll to short NOV PUTs as required.

    If you go with calendars, there is no margin requirement over and above the debit paid for the calendar. If you go with a diagonal, then there is an embedded credit spread in the position which has margin requirements attached to it.

    Good luck.

  6. sell 60d 10950 call + buy 11000 call
  7. Sell a conservative number of ITM calls and pyramid your profits as the market moves lower.

    Never add to the position if it is showing you red.
  8. ya sorry, meant before exp.
  9. This whole thread has gotten me to think...why wouldn't anyone ever take out an option on the dia or spx one year in advance and just bet that ii will increase by 10%? There has to be money in it. The downside of course is that they can't bet the rest fo the year:p
  10. What you mean 'take out'? You mean buy?
    If it is considered probable by the market that the SPX will rise 10% in a year indeed, then the premium payed will not cover the loss in time-value. Have you looked at the prices?
    "gotten me to think" indeed... :)

    #10     Sep 12, 2006