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On Nov 28, 11:13am, Dr. John Cappello wrote:
>
> More importantly I am prepared to post what could be a most excellent trade
> along with the logic. One can sell a naked Feb. 1220 put at a price I was
> given based upon Fri. close for 11.75. Suppose it is only 11.0 then the
> premium would be $2750. To hit that number the S&P would have to close 15%
> below current levels in Feb. - something that I do not believe has
> happened in 5 years. It has penetrated but not closed below according
> to data given me.
>
> Likewise,if you got cold feet you could buy the put if it hit 1245 for
> pretty close to your premium or a slight loss based upon current price
> action which I know is subject to change but is at least a hardcore number.
>
> Everything is risk/reward and in the final analysis would it really be so
> bad to be long at 1220 if you got executed.
John, a few comments:
- You're talking about SP futures options here, so it is important
to remember that the Feb. options are trading off of the March
contract. There is a built in time decay (called the premium
on the future) of about 1%. This is not a big deal to the
position that you suggest - it is simply to point out there
are some important differences between options on futures and
cash index futures like SPX. Also, if your put is exercised,
then you end up owning a future, with all the leverage and
margin implication that implies.
- Currently, VIX, which is a decent proxy for the implied vol.
of the SP contract is low. Can it go lower? Sure. But if
the implied volatility increases, those put options will increase
in value as well. Typically, as the market drops, the implied
volatility goes up. So, it may be the case that the market trades
quickly down to your 1245 figure, and that your puts are worth
a lot more than what you sold them for.
- Feb. is on the other side of Y2K. You're making a wager that
there will be no Y2K effect. Fair enough, but if there is a
big Y2K problem, your short puts will be threatened.
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