Quote:
Originally Posted by Rupert Pupkin
No, I meant unlimited downside risk. You don't limit your upside risk by buying options. You only limit your dowside risk. Let's say I would have shorted 1,000 Spyders. I would have unlimited downside risk. If the market went straight up, you could lose tens of thousands of dollars if you were short Spyders. I don't think it's going to happen but let's just say that the Dow went up to 14,000. If you were short 1,000 Spyders, you would lose over $40,000. If you buy 20 puts instead for $2.00, the market can go straight up and the most you lose is $4k. Yet you still have the big upside with the puts. If the Dow goes to 5,000, you would make around $40k with the puts.
The one big negative with buying the out-of-the-money puts is that you need a big move down. If you just get a small move down, you will lose money.
With regard to the July puts, they are obviously more of a gamble than the August puts. You don't have as much time but you pay less premium. I figured that if we are in a free-fall right now that I wouldn't need the extra time. If we get a bounce and the big drop doesn't start until August, I still have my December puts.
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If you short the SPY stock/ETF (which is what I thought you were talking about) you're risk is to the upside.
In reguard to the August puts, all I was saying is that if you act quick enough you might be able to roll the position for a more limited cost than if you should just let the July expire and then eventually buy August or even Sept. puts.
And like I mentioned, for some reason you think a selloff/mini crash is coming look into those weekly options. They offer them in a number of products (including SPY). Those things are usually cheap because of the limited time value of the option and makes them a good gamble.