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  1. #1
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    Default Risks of long put stratergy?

    Just wondering if there are any non-obvious risks of buying some long put options in one of the US index ETFs.

    Obviously there is exchange rate risk since it'll be USD denominated. And the serious risk that my little punt doesn't pay off before option expiry (would be 1 year expiry).

    So if for example i was to buy USD$3000 of put options with a strike that is say 10% below the current ETF value.

    If the bull market keeps going I lose the $3k when the options expire worthless.

    If the sector tanks as I expect it will sooner or later, then I make (Strike - option price - ETF value) at sale.

    Is there counterparty risk I need to be aware of? or any other risks.
    My first time looking at put options, have only purchased call options before, and still waiting for those to pay off.

  2. #2
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    Quote Originally Posted by Vagabond47 View Post
    Just wondering if there are any non-obvious risks of buying some long put options in one of the US index ETFs.

    Obviously there is exchange rate risk since it'll be USD denominated. And the serious risk that my little punt doesn't pay off before option expiry (would be 1 year expiry).

    So if for example i was to buy USD$3000 of put options with a strike that is say 10% below the current ETF value.

    If the bull market keeps going I lose the $3k when the options expire worthless.

    If the sector tanks as I expect it will sooner or later, then I make (Strike - option price - ETF value) at sale.

    Is there counterparty risk I need to be aware of? or any other risks.
    My first time looking at put options, have only purchased call options before, and still waiting for those to pay off.
    From my uni knowledge and some sector experience, if you are only purchasing a put, or going long the put, then the only risk is the money you put in. Its not like writing puts or call etc. You obviously know enough about options to appreciate you pay a premium with time value etc. (as an aside, just be careful that you do not pay too much, ie that the margin between bid and call is not too great, but otherwise I cannot see any other risk)

  3. #3
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    So these puts are out of the money at the start. I'm not saying your wrong I'm just not a fan of risk.
    h2

  4. #4
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    Quote Originally Posted by h2so4 View Post
    So these puts are out of the money at the start. I'm not saying your wrong I'm just not a fan of risk.
    Yeah, just reinstalling office to run various numbers and see where they end up, but the idea is that these puts are an insurance policy against a meltdown of the underlying index. Out of the money options are half the price of near the money options with the same expiry, meaning my "insurance" policy pays out a lot more if it kicks in for the same amount of premium. I guess it's sort of trading off a larger excess for lower premiums.

  5. #5
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    Quote Originally Posted by Vagabond47 View Post
    Yeah, just reinstalling office to run various numbers and see where they end up, but the idea is that these puts are an insurance policy against a meltdown of the underlying index. Out of the money options are half the price of near the money options with the same expiry, meaning my "insurance" policy pays out a lot more if it kicks in for the same amount of premium. I guess it's sort of trading off a larger excess for lower premiums.
    I think of it more of gambling based on time the options have to run rather than insurance. One fact I'll point out is that 50 to 80% of all options expire worthless.
    Still that's not a reason not to do it.
    h2

  6. #6
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    It can be better or worse than what you stated - the variable is not just price and time, but implied volatility. You can be right on the price direction but lose your premium (and vice versa).

    Options are very difficult to make money off outright. E.g. if you pay for a 10% OOM option now for one year out, it will be expensive, and markets could easily run up 20% in the meantime before falling as you predict by the expiration date. I find them most relevant as a volatility dampening component of a long equity strategy, or as an outright short term trading strategy (e.g. those who levered a short term "crash view" by buying short dated deep out of the money put options in late January, made out like bandits.)

    All fun and games otherwise!

  7. #7
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    Quote Originally Posted by Lego_Man View Post
    markets could easily run up 20% in the meantime before falling as you predict by the expiration date.
    This is one of the advantages of an option. In that during a period when you are deep out of the money, you can hold with no further capital required. Time is your saviour here. It may come back to be in the money and you're not forced to sell. An option is not killed by volatility alone.

    Regarding a long put , now i tend to think that it is simply better to go long on the basis that equity markets rise more than they fall.
    For clarity, nothing I say is advice....

  8. #8
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    Quote Originally Posted by peat View Post
    This is one of the advantages of an option. In that during a period when you are deep out of the money, you can hold with no further capital required. Time is your saviour here. It may come back to be in the money and you're not forced to sell. An option is not killed by volatility alone.

    Regarding a long put , now i tend to think that it is simply better to go long on the basis that equity markets rise more than they fall.

    Yeah. Though to be honest I'd rather hold cash + call options right now, than equities + put options.

  9. #9
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    Quote Originally Posted by peat View Post
    This is one of the advantages of an option. In that during a period when you are deep out of the money, you can hold with no further capital required. Time is your saviour here. It may come back to be in the money and you're not forced to sell. An option is not killed by volatility alone.

    Regarding a long put , now i tend to think that it is simply better to go long on the basis that equity markets rise more than they fall.
    I think I'll stick with Buffetts two rules on investing.
    h2

  10. #10
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    Question for posters here who seem to have experience with put options, which brokers to you recommend for buying them on ASX and/or US stocks?

  11. #11
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    Quote Originally Posted by DarkHorse View Post
    Question for posters here who seem to have experience with put options, which brokers to you recommend for buying them on ASX and/or US stocks?
    Capital 19 Sydney

  12. #12
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    Thanks stoploss. I was thinking NZ based...don't have an Australian account so would that be an issue?

  13. #13
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    [QUOTE=DarkHorse;775783]Thanks stoploss. I was thinking NZ based...don't have an Australian account so would that be an issue?[/QUO

    I don't have an aussie account . You can pay Kiwi into a citibank auck account from memory then it just converts it to whatever ccy you need.
    They use an IB platform , they are very good on options .

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