“I’m a bit frustrated that I only make about 50% on Jan 08 puts if the NASDAQ falls 10%. I’m comparing that against simply shorting the index, which would net me 10% under the same condition, only with much less risk.”
I also thought about using shorts but am at least ruling that out for myself. Firstly, I don’t think shorting is better/worse compared to puts. I just see it as different ways to skin a cat. Putting the supposed risk of unlimited loss aside since getting squeezed on QQQQ is highly unlikely, I think put options offer what I call execute-then-take-a-vacation benefit because you know the maximum downside. Besides, what I hate the most is I’m right about the ending but was wrong about the process.
The markets are surprisingly strong at this point meaning collectively we assign a low probability to recession in 2007. Besides, the market’s track record for mid-election year bounces is just too good to ignore. So it seems that the insurance premium paid via the put option is not that bad.
“I think what I’ll do is spend HALF of what I plan to spend on options this week and hold the rest in my back pocket”
I think that’s a good strategy.
And how do you choose amongst the different strikes ? I usually stay away from out-of-the-money options and focus on options that are in-the-money a little bit, and just look at the BEP% to see if it’s reasonable (by gut feel). I wonder if there’s a more scientific way to do it.
