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Earl wrote:
> The only disaster insurance for a long position is a put and the
> only disaster insurance for a short position is a call.
I understand, but the question is the cost. Does it cost so much
that you're better off to just go flat?
If I understand things correctly, 2 options offset 1 futures
contract, right? So let's say I feel I can absorb 100 S&P points on
a long position before needing the insurance to kick in. S&P is
currently at about 1450, so I'd want insurance at 1350. Feb 1350
puts are currently at about 12 1/4, so it would cost me about $2500
per contract to buy disaster insurance that would last 3 weeks. Mar
1350 puts are twice that price, so that's $5000 for 7 weeks of
protection. Pricey. Even if you liquidate the option after a short
2-5 day trade, if the market moves as you hope it does, then the
option is worth maybe 10% of its purchase price when you exit your
trade. $2500 or $5000 would take a damn big bite out of my trades,
considering they only average about $2200.
It would cost about $1000 per contract to buy a put 230 points OTM
and it still leaves me open to a $57k/contract hit. That is damn
expensive insurance with very little protection.
Or am I misunderstanding how this works?
I need to look into Ben's approach more closely. Maybe he's found a
way to do this without blowing all your profits on insurance. But I
don't see how you could sell far-out (100pt OTM) calls for as much as
the close-in (25pt OTM) puts cost you....
Gary
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