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Discussion Starter #1
I'm new here but I've been trading for a little over a year. I'll get to the point.

If you believe the market is going to crash, would this be a sound strategy:

Selling deep in the money Call option (IE RBC Trading at $89/share, selling $40 Call)
Then for insurance, in case I'm wrong, buying an at the money option (buying $90 call at $5)
This of course is for expiry at the end of the year.

Selling for the premiums and then buying for the insurance in case it goes back up
I've calculated that there is some lose and if anyone's interested I can run the numbers here but just talking about the strategy alone, would you guys thing this is something worth doing? Want your opinions please.

If you think this isn't good, how would you tweak it?
 

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I wouldn't short a bank, I would look for something that would really collapse like an overpriced tech company, resort or airline. Then I would short the stock and copper my bet with some OTM calls. Or sell ATM calls and buy OTM calls to take advantage of premium decay.

A few years ago I might have done this trade, now I am off options and would sooner just buy stocks or sell them short with a stoploss order for protection.
 

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I'm new here but I've been trading for a little over a year. I'll get to the point.

If you believe the market is going to crash, would this be a sound strategy:

Selling deep in the money Call option (IE RBC Trading at $89/share, selling $40 Call)
Then for insurance, in case I'm wrong, buying an at the money option (buying $90 call at $5)
This of course is for expiry at the end of the year.

Selling for the premiums and then buying for the insurance in case it goes back up
I've calculated that there is some lose and if anyone's interested I can run the numbers here but just talking about the strategy alone, would you guys thing this is something worth doing? Want your opinions please.

If you think this isn't good, how would you tweak it?
@ the money options are best for trading most liquid

Deep in the money options with little premium & mostly intrinsic value are good for being long since they give the underlying a positive curvature i.e., the option has no choice but to move point for point when the market moves in your direction since there is no premium or little premium to contract. If market moves against you premium will expand.

Being long OTM & or far OTM options are best used for explosive moves in the market since premium will expand when the market moves explosively in your direction.

You want to sell a deep in the money call that has little to no premium If the market crashes the premium will expand in the option off setting a large portion of the expansion of the increase in intrinsic value. Plus you want to buy the option with the highest premium the @ the money.

If your want to play a crash would probably just buy OTM puts. If your right you make big if your wrong option will probably expire worthless.

If you want to short would play spy or spx since if the market crashes the reward will almost always be higher then playing an individual stock
 

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If you believe the market is crashing, it is better to trade an underlying that represents the market. I think the suggestions above (SPX and SPY) are the best in terms of liquidity. An exception could be if you already own RBC or another stock, in which case if you sell DITM call it would be considered a covered call (matching contracts). Consequently, there will be no need for margin and no cash outlay (since it is done for a credit).

Selling ATM calls offers less downside protection (or opportunity), but is more neutral. If the market goes up, the premiums received will cover part of the upside lost.

Buying puts could be a good way to short the market. If you are right on the trade, not only will you benefit from the negative deltas, but expansion in volatility will be icing on the cake. But you could lose the premiums even in a flat market.
 

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Discussion Starter #5
If you believe the market is crashing, it is better to trade an underlying that represents the market. I think the suggestions above (SPX and SPY) are the best in terms of liquidity. An exception could be if you already own RBC or another stock, in which case if you sell DITM call it would be considered a covered call (matching contracts). Consequently, there will be no need for margin and no cash outlay (since it is done for a credit).

Selling ATM calls offers less downside protection (or opportunity), but is more neutral. If the market goes up, the premiums received will cover part of the upside lost.

Buying puts could be a good way to short the market. If you are right on the trade, not only will you benefit from the negative deltas, but expansion in volatility will be icing on the cake. But you could lose the premiums even in a flat market.
I'm hearing a lot of buy an ATM Put so if there is a crash, just sell it later or let it expire if it doesn't move your way.

So serious question cause I don't know this and haven't tried. Can you buy a Put option without having the underlying?
 

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I'm hearing a lot of buy an ATM Put so if there is a crash, just sell it later or let it expire if it doesn't move your way.

So serious question cause I don't know this and haven't tried. Can you buy a Put option without having the underlying?
In a crash the big money is made buying the OTM put & selling @ max momentum down of the underlying. The strike price does not have to be met to make the big money since the premium explodes higher. If you want to sell your option @ a latter date the @ the money will be more liquid. OTM or far OTM often best to just let expire worthless since bid/ask spread is so wide.
 

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I'm hearing a lot of buy an ATM Put so if there is a crash, just sell it later or let it expire if it doesn't move your way.

So serious question cause I don't know this and haven't tried. Can you buy a Put option without having the underlying?
As andrewf stated above the answer is yes. But you will have a cash outlay to buy a put option. If you hold the underlying, you would be protecting it from a loss. If you buy the put without the underlying, you generally need the underlying to go down to profit.

As lonewolf stated above, an OTM put would benefit in 2 ways from a market crash; one is the deltas gained by the market approaching the strike price and the other is the expansion in volatility (VIX). But most OTM options expire worthless, so it not an easy trade to consistently hold.
 

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A professional who was doing this, would buy in the money puts to reduce premium cost. An amateur would buy far out of the money puts because they are cheap, and even if he was right, might not make a cent if the underlying did not drop well past his strike price.
 

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A professional who was doing this, would buy in the money puts to reduce premium cost.
The premiums will be higher for an ITM option, but agree that there is less time value and less decay. OTMs offer more leverage; ITM better track the move (both up and down).

An amateur would buy far out of the money puts because they are cheap, and even if he was right, might not make a cent if the underlying did not drop well past his strike price.
That only applies if you hold until expiration. Before expiration, a sharp down move in the underlying will result in the price of the option increasing due to the deltas as well as volatility spike. But in an up market or even neutral market, they will quickly decay.
 

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The premiums will be higher for an ITM option, but agree that there is less time value and less decay. OTMs offer more leverage; ITM better track the move (both up and down).



That only applies if you hold until expiration. Before expiration, a sharp down move in the underlying will result in the price of the option increasing due to the deltas as well as volatility spike. But in an up market or even neutral market, they will quickly decay.
This is true if you get the timing exactly right, buy the puts the day before the crash begins while vol is still cheap, but don't lose to time decay, and sell at exactly the right time.

In 2018 there was a mysterious trader called "50 cent" who did this in the VIX. Someone bought 50,000 cheap VIX calls every month always ones selling for 50 cents. Month after month they expired worthless, then one month the VIX exploded and he made 200 million dollars in a week. It can work in some circumstances but I don't like it as a strategy.
 

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A professional who was doing this, would buy in the money puts to reduce premium cost. An amateur would buy far out of the money puts because they are cheap, and even if he was right, might not make a cent if the underlying did not drop well past his strike price.
Most of the time deep in the money is the ones to buy since if markets goes sideways little time premium is lost plus the positive curvature meaning if market moves against you premium expands & if underlying moves in your direction there is almost no premium to contract. Though would want to not hold them with less then 6 months till expire

Though OTM puts can be real big money makers if they are not purchased to far in advanced or sold weeks after a market crash. In the 1987 crash options lost about half their premium an hour after the crash had bottomed. Was listening to an interview of Arch Crawford a few years back & he said something like he purchased 2500 of put options & turned it into 500,000. The only way to get those types of gains in a crash is with OTM options. Arch has an amazing track record.
 

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Discussion Starter #14
I just ran into this tonight, but I think TAIL (the ETF) is a much easier way to do "crash insurance". Pricing options is pretty tricky business. See this other thread:

Stock investing with black swan protection
Hi James, thank you for the tip, I will look into this. Although I'm looking for income, not protection. My feeling is that there will be a crash and I want to make sure I'm doing the smart thing.

So far, what I'm hearing and what I like is buying OTM Puts, wait for the crash and sell when they have intrinsic value (becoming hopefully Deep ITM)
 

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Hi James, thank you for the tip, I will look into this. Although I'm looking for income, not protection. My feeling is that there will be a crash and I want to make sure I'm doing the smart thing.

So far, what I'm hearing and what I like is buying OTM Puts, wait for the crash and sell when they have intrinsic value (becoming hopefully Deep ITM)
You want to sell @ max momentum down. I had some 20 to 30 fold gains during crashes using OTM puts selling near max momentum down & never did the puts have intrinsic value they were to far OTM of the money.
 

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Discussion Starter #16
You want to sell @ max momentum down. I had some 20 to 30 fold gains during crashes using OTM puts selling near max momentum down & never did the puts have intrinsic value they were to far OTM of the money.
What do you mean max momentum? When they have already started to go down? Is that too late?

Also, how far out would you go for the expiry and how deep OTM would you go? For instance, would you buy Air Canada Put at $8 strike (Currently at $18/share) for October 2020? Jan 2021? Jan 2022?

This is just for an example, I won't take it as gospel, still trying to get my bearings with all this. I'm relatively new to investing/trading
 
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