I am a newbie , so I am not sure if what I am asking makes sense.....First, I assume that there are options to sell S&P 2 years down the road for various levels..3000,3200....3500....4000 etc. If the value of the S&P is $3500 today and lets say the option to sell at $3700 in two years costs $200. ANd suppose you own one unit of S&P today...... so you spend 200 to buy the option to sell at 3700....If market is at 3800 in two years, you made $100. If market is anywhere less than 3700, you break even..... Is this a way to protect your portfolio from asset loss , at the cost of a lower rate of return ? I remember years ago, I would buy products that guaranteed me no loss of investment but guaranteed me a minimum percentage of any index fund gain..... Hopefully someone can make sense of what I am saying . Thanks
Yep, that'd work. Taking it a bit further to account for extrinsic value: You are apparently talking about buying an "in-the-money" 3700 put (buying an option to sell at 3700) when the current market is at 3500. You'd be buying a put that is currently "in the money" by 200. The intrinsic value would be 200. The total value of the put would also have some extrinsic (time) value based on market forces. Let's say it is 20. If the market moves above the 3700 strike then it would be "out of the money" and once the time value expired the put would be worthless. So yes you'd lose 220 on the put but make 300 on the underlying for a net gain of 80. If the market moves lower than 3500, say to 3300. Then yes you're protected. The put's intrinsic value would become $400 and have zero extrinsic value at expiration. So you would lose 200 on the underlying but the intrinsic value of the put would be 3700-3300=400. So your net would be the 200 loss on the underlying and a 180 gain on the put equaling a small loss of 20.
yeah, so going from theoretical to practical.......can you tell me real approximate numbers doing this strategy if you have, say, $100,000? How much do the puts cost, relative to the 100,000? Can you show me an example?
I've never played leaps or the in-the-money option strategy you're talking about, but for the sake of fun with math: Say you buy 300 shares of the SPY at $350/share = $105,000. Then you buy 3 Jan2022 370 puts. At today's close you would have paid about $47.50 x 300 = $14,250. Assuming you hold until Jan 21, 2020: If the SPY closes at 370 the put is worthless but you gained $20/share on the underlying or $6000. Your net would be a loss of $6000 - $14,250 = ($8250). Not good, your paying for a lot time premium, a lot of extrinsic value. To break even you would need the SPY to close $14,250/300 = $47.50 higher or at a price of $397.50. If the SPY closes at 330 you could exercise the 370-put for a gain of $20 x 300 = $6000 but again you already paid 14,250 for that put, so you'd have the same $8250 net loss. Without the put your loss would be $6000. Today's 350 puts last went for about 38.50. You could have bought the 330 calls today at about $46. I'll let you do the math on those. My preferred strategy would be to sell (write) shorter term calls or puts just out of the money a month or even a week out...selling premium. But you have to get the timing and direction right. There are much better option traders on this site than me. Maybe they'll weigh in.
thanks....yeah, I'm looking for some kind of immunization strategy on my portfolio. I have no reason to take any downside risk but want to stay in the market
