Put Options

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
ge1
Posts: 325
Joined: Sat Apr 28, 2012 8:15 pm

Put Options

Post by ge1 » Sun Sep 09, 2018 7:48 am

(Before everybody is telling me I shouldn't trade in options: The amount I'm speculating with represents a tiny portion of our net worth, much less than 1%. If I lose the whole amount, so be it. Call it financial curiosity or gambling, I know it's not investing.)

So my question is this: I would like to buy put options on tech high flyers such as AMZN, as I think they shares are massively overvalued. For anybody who has done this, at what strike price do you think I should buy the puts? I'm thinking fairly deep out of the money with expiration date June 2019 or even January 2020? For example I see January 2020 puts with a strike of 1,500 trading at 75.

Again, I realize this is not a regular bogleheads question, but given how financially literate this forum is, I'm sure a few of the esteemed members have dabbled in options in their prior / current life...

thanks

User avatar
Alexa9
Posts: 1571
Joined: Tue Aug 30, 2016 9:41 am

Re: Put Options

Post by Alexa9 » Sun Sep 09, 2018 7:57 am

I would consider it gambling money with slightly better odds than Vegas. I think the shorter duration and the lower price will give you a lower entry fee but worse odds/rewards. Longer duration and higher price gives you a higher entry free and better odds/rewards.

User avatar
whodidntante
Posts: 4051
Joined: Thu Jan 21, 2016 11:11 pm

Re: Put Options

Post by whodidntante » Sun Sep 09, 2018 8:06 am

Speculation isn't the only reason to use options, but people do it every day the market is open. Sometimes long-dated options are mispriced, so make sure you aren't overpaying. You're probably looking at contracts with basically no volume.

ge1
Posts: 325
Joined: Sat Apr 28, 2012 8:15 pm

Re: Put Options

Post by ge1 » Sun Sep 09, 2018 8:10 am

There is actually a decent volume in these, especially at round prices such as 1500 for AMZN or 250 or 300 for NFLX.

I'm thinking June 2020 puts to allow enough time and strike price @ 30% discount to current price. (That would still have been the record high only a few months back given the run up in these stocks.)

bgf
Posts: 609
Joined: Fri Nov 10, 2017 9:35 am

Re: Put Options

Post by bgf » Sun Sep 09, 2018 8:10 am

I'm not an expert and many here are more knowledgeable than I am. nobody here can tell you the right price because that depends on your particular strategy and option prices change rapidly.

what helped me was doing paper trading and comparing similar trades to other stocks as well as ETFs like SPY. this will give you a feel for which options are "expensive" and how that affects your payout. play around with the numbers and calculate the intrinsic value. if you could calculate extrinsic value across time and changing volatility then you wouldn't be asking your question. so your analysis will probably have to stick to intrinsic value assuming your play actually works out.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

cjking
Posts: 1811
Joined: Mon Jun 30, 2008 4:30 am

Re: Put Options

Post by cjking » Sun Sep 09, 2018 8:20 am

Whatever strike you settle on, calculate how long you can keep/renew the bet before you will have spent more in total than you'll make if you're subsequently proved right.

I had a similar intuition about the S&P 500 and placed some bets in 1998/1999/2000, but eventually gave up on this strategy when I realised that I could be proved right and yet still get back less than I'd put in along the way. (I think I roughly broke even by the time I gave up.)

timmy
Posts: 723
Joined: Thu Jun 14, 2012 2:57 pm

Re: Put Options

Post by timmy » Sun Sep 09, 2018 8:54 am

Read up on it ...

Options are complicated, or at least not easy. So read up. I found this book useful.

https://www.amazon.com/Options-as-Strat ... th+edition

The market in listed options and non-equity option products provides investors and traders with a wealth of new, strategic opportunities for managing their investments. This updated and revised Fifth Edition of the bestselling Options as a Strategic Investment gives you the latest market-tested tools for improving the earnings potential of your portfolio while reducing downside risk—no matter how the market is performing.

Inside this revised edition are scores of proven techniques and business-tested tactics for investing in many of the innovative new options products available. You will find:

•Buy and sell strategies for Long Term Equity Anticipation Securities (LEAPS)
•A thorough analysis of neutral trading, how it works, and various ways it can improve readers’ overall profit picture
•Detailed guidance for investing in Preferred Equity Redemption Cumulative Stocks (PERCS) and how to hedge them with common and regular options
•An extensive overview of futures and futures options

Written especially for investors who have some familiarity with the option market, this comprehensive reference also shows you the concepts and applications of various option strategies -- how they work, in which situations, and why; techniques for using index options and futures to protect one’s portfolio and improve one’s return; and the implications of the tax laws for option writers, including allowable long-term gains and losses. Detailed examples, exhibits, and checklists show you the power of each strategy under carefully described market conditions.


I've used options mostly for insurance, protecting positions against partial or total losses.

grok87
Posts: 8386
Joined: Tue Feb 27, 2007 9:00 pm

Re: Put Options

Post by grok87 » Sun Sep 09, 2018 10:55 am

ge1 wrote:
Sun Sep 09, 2018 7:48 am
(Before everybody is telling me I shouldn't trade in options: The amount I'm speculating with represents a tiny portion of our net worth, much less than 1%. If I lose the whole amount, so be it. Call it financial curiosity or gambling, I know it's not investing.)

So my question is this: I would like to buy put options on tech high flyers such as AMZN, as I think they shares are massively overvalued. For anybody who has done this, at what strike price do you think I should buy the puts? I'm thinking fairly deep out of the money with expiration date June 2019 or even January 2020? For example I see January 2020 puts with a strike of 1,500 trading at 75.

Again, I realize this is not a regular bogleheads question, but given how financially literate this forum is, I'm sure a few of the esteemed members have dabbled in options in their prior / current life...

thanks
buying put options is a suckers bet. they are way overpriced.
Keep calm and Boglehead on. KCBO.

stlutz
Posts: 4742
Joined: Fri Jan 02, 2009 1:08 am

Re: Put Options

Post by stlutz » Sun Sep 09, 2018 11:04 am

buying put options is a suckers bet. they are way overpriced.
What would be the better way to try and profit from a significant decline in AMZN?

Valuethinker
Posts: 36009
Joined: Fri May 11, 2007 11:07 am

Re: Put Options

Post by Valuethinker » Sun Sep 09, 2018 11:23 am

grok87 wrote:
Sun Sep 09, 2018 10:55 am
ge1 wrote:
Sun Sep 09, 2018 7:48 am
(Before everybody is telling me I shouldn't trade in options: The amount I'm speculating with represents a tiny portion of our net worth, much less than 1%. If I lose the whole amount, so be it. Call it financial curiosity or gambling, I know it's not investing.)

So my question is this: I would like to buy put options on tech high flyers such as AMZN, as I think they shares are massively overvalued. For anybody who has done this, at what strike price do you think I should buy the puts? I'm thinking fairly deep out of the money with expiration date June 2019 or even January 2020? For example I see January 2020 puts with a strike of 1,500 trading at 75.

Again, I realize this is not a regular bogleheads question, but given how financially literate this forum is, I'm sure a few of the esteemed members have dabbled in options in their prior / current life...

thanks
buying put options is a suckers bet. they are way overpriced.
Is this the "Volatility Smile" to which you are referring?

Or some more general property of Put options?

It makes sense that they should be overpriced in the case of Amazon. A company like Amazon will have a lot of connected parties like employees with huge capital gains but locked in for various reasons (insiders, capital gains tax etc.). Thus they will seek to buy Puts.

Valuethinker
Posts: 36009
Joined: Fri May 11, 2007 11:07 am

Re: Put Options

Post by Valuethinker » Sun Sep 09, 2018 11:25 am

stlutz wrote:
Sun Sep 09, 2018 11:04 am
buying put options is a suckers bet. they are way overpriced.
What would be the better way to try and profit from a significant decline in AMZN?
Short sell it. Beware the short cover though.

fmhealth
Posts: 164
Joined: Tue Mar 25, 2008 10:24 am

Re: Put Options

Post by fmhealth » Sun Sep 09, 2018 11:48 am

What is your exit strategy?

Be Well,
fmhealth

Kevin8696
Posts: 155
Joined: Mon Oct 08, 2012 7:45 pm

Re: Put Options

Post by Kevin8696 » Sun Sep 09, 2018 11:55 am

Instead of buying puts, have you looked at selling a call spread ?

grok87
Posts: 8386
Joined: Tue Feb 27, 2007 9:00 pm

Re: Put Options

Post by grok87 » Sun Sep 09, 2018 12:02 pm

Valuethinker wrote:
Sun Sep 09, 2018 11:23 am
grok87 wrote:
Sun Sep 09, 2018 10:55 am
ge1 wrote:
Sun Sep 09, 2018 7:48 am
(Before everybody is telling me I shouldn't trade in options: The amount I'm speculating with represents a tiny portion of our net worth, much less than 1%. If I lose the whole amount, so be it. Call it financial curiosity or gambling, I know it's not investing.)

So my question is this: I would like to buy put options on tech high flyers such as AMZN, as I think they shares are massively overvalued. For anybody who has done this, at what strike price do you think I should buy the puts? I'm thinking fairly deep out of the money with expiration date June 2019 or even January 2020? For example I see January 2020 puts with a strike of 1,500 trading at 75.

Again, I realize this is not a regular bogleheads question, but given how financially literate this forum is, I'm sure a few of the esteemed members have dabbled in options in their prior / current life...

thanks
buying put options is a suckers bet. they are way overpriced.
Is this the "Volatility Smile" to which you are referring?

Or some more general property of Put options?

It makes sense that they should be overpriced in the case of Amazon. A company like Amazon will have a lot of connected parties like employees with huge capital gains but locked in for various reasons (insiders, capital gains tax etc.). Thus they will seek to buy Puts.
Hi Valuethinker,
agree about volatility smile and about your point on amazon.
i was mostly thinking of this paper

https://www.google.com/url?sa=t&rct=j&q ... -vSJBcXHAD

or google "Do Financial Markets Reward Buying or Selling Insurance and Lottery Tickets?" by ilmanen

page 29

"Left Tail: Insurance. Equity index volatility selling and equity index put selling are archetypal strategies for selling financial catastrophe insur- ance. Although these strategies can consistently accrue small gains over many years, rare large losses disproportionately occur in very bad times. This terrible timing of losses is a more important reason to warrant large required risk premiums than the asymmetry of returns per se.8
The ex ante premium between implied volatil- ity and realized volatility has almost always been positive for S&P 500 Index options, giving an edge to option sellers (Figure 2). This positive gap has been more consistent for equity index options than for individual stocks or other asset classes, presum- ably because the risk in equity market downturns is such an important systematic risk (for the same sign but weaker results with other investments, see Buraschi, Trojani, and Vedolin 2009; Duarte, Long- staff, and Yu 2007; Trolle and Schwartz 2008)."

cheers,
grok
Last edited by grok87 on Sun Sep 09, 2018 12:18 pm, edited 1 time in total.
Keep calm and Boglehead on. KCBO.

hdas
Posts: 229
Joined: Thu Jun 11, 2015 8:24 am

Re: Put Options

Post by hdas » Sun Sep 09, 2018 12:11 pm

stlutz wrote:
Sun Sep 09, 2018 11:04 am
What would be the better way to try and profit from a significant decline in AMZN?
If interested in selling tech, perhaps short NQ futures (NQ 100)

Top 10 Holdings (56.13% of Total Assets)
Name % Assets
Apple 12.53%
Amazon.com 11.01%
Microsoft Corp 9.74%
Alphabet Inc Class C 4.90%
Facebook Inc A 4.83%
Alphabet Inc A 4.24%
Intel Corp 2.55%
Cisco Systems Inc 2.51%
Comcast Corp Class A 1.91%
NVIDIA Corp 1.91%

I’m not endorsing the idea of shorting tho.

Cheers, :greedy

ge1
Posts: 325
Joined: Sat Apr 28, 2012 8:15 pm

Re: Put Options

Post by ge1 » Sun Sep 09, 2018 12:53 pm

Thanks for all the feedback, will look into those ideas.

For those that are saying that the puts are way overpriced: If take a stock like NFLX I can buy a put expiring in June 2020 with a strike price of 300 for $35. So should the Netflix share price go below $265 by June 2020, I make money. Now, NFLX crossed $265 for the first time only in January this year, so to me it doesn't seem far fetched that the share price between now and June 2020 could move back towards that level. And if that move would happen soon, I would be rewarded nicely given the time value of the option.

ge1
Posts: 325
Joined: Sat Apr 28, 2012 8:15 pm

Re: Put Options

Post by ge1 » Sun Sep 09, 2018 12:53 pm

fmhealth wrote:
Sun Sep 09, 2018 11:48 am
What is your exit strategy?

Be Well,
fmhealth
No exit strategy, the investment would be worthless.

ge1
Posts: 325
Joined: Sat Apr 28, 2012 8:15 pm

Re: Put Options

Post by ge1 » Sun Sep 09, 2018 12:54 pm

Valuethinker wrote:
Sun Sep 09, 2018 11:23 am
grok87 wrote:
Sun Sep 09, 2018 10:55 am
ge1 wrote:
Sun Sep 09, 2018 7:48 am
(Before everybody is telling me I shouldn't trade in options: The amount I'm speculating with represents a tiny portion of our net worth, much less than 1%. If I lose the whole amount, so be it. Call it financial curiosity or gambling, I know it's not investing.)

So my question is this: I would like to buy put options on tech high flyers such as AMZN, as I think they shares are massively overvalued. For anybody who has done this, at what strike price do you think I should buy the puts? I'm thinking fairly deep out of the money with expiration date June 2019 or even January 2020? For example I see January 2020 puts with a strike of 1,500 trading at 75.

Again, I realize this is not a regular bogleheads question, but given how financially literate this forum is, I'm sure a few of the esteemed members have dabbled in options in their prior / current life...

thanks
buying put options is a suckers bet. they are way overpriced.
Is this the "Volatility Smile" to which you are referring?

Or some more general property of Put options?

It makes sense that they should be overpriced in the case of Amazon. A company like Amazon will have a lot of connected parties like employees with huge capital gains but locked in for various reasons (insiders, capital gains tax etc.). Thus they will seek to buy Puts.
Employees wouldn't be allowed to buy put options on their stock holdings?

JackoC
Posts: 196
Joined: Sun Aug 12, 2018 11:14 am

Re: Put Options

Post by JackoC » Sun Sep 09, 2018 3:12 pm

Stock put option prices should contain some risk premium, IOW expected return better for sellers than buyers. But as given in the quote above by Ilmanen, this should be more true for equity index options than individual stock options because big stock *market* down moves are of systemic importance and make the losses of those short put options pretty much automatically badly timed. The fall of a high flyer stock can occur in the context of heightened systemic risk or not, also depending how much you expect it to fall.

I don't agree with the suggestion to short the stock (naked) instead of buying puts for somebody who says they are inexperienced and just want to play around. People short stocks (or options) naked, and live to tell of it, every day but I don't think it's right for people who don't know how they react to trading adversity, except on a very small scale of shares, much smaller than the number of shares on which the same person might safely buy options, or do a call or put* spread (long options which truncate your loss on options you are short).

As OP said, there need be no 'exit strategy' for being long options, in fact it might not be realistic in terms of liquidity or one's own behavior to assume one will sell out of such a position. Just size it to be able to accept losing 100% of the premium.

If (if, if, if) you want to do this type of play on individual stock with options, the CNBC show 'Options Action' is not bad IMO to get a feel for conventional types of plays by experienced traders. The strikes, put v call, strike or calendar spread etc. usually involves the particular story you think is likely to play out in the stock, rather than one or another basic option strategy or strike being inherently superior to others. That show AFAIK will never suggest naked shorting of anything, I assume it's a corporate policy of CNBC.

*buy a put at some strike that represents a significant setback you think the high flyer might suffer; sell a put with a lower strike more consistent with a general melt down. That way besides limiting your investment (and limiting your upside in trade obviously) you also limit how much the 'volatility smile' works against you: the lower strike option you sell probably has more systemic risk premium in its price than the one you buy, but the first one covers you if the whole market falls into a black hole. And it's based on a more similar 'story' one feels will play out to an outright put buy than an out of the money call spread would be.
Last edited by JackoC on Sun Sep 09, 2018 3:18 pm, edited 1 time in total.

Valuethinker
Posts: 36009
Joined: Fri May 11, 2007 11:07 am

Re: Put Options

Post by Valuethinker » Sun Sep 09, 2018 3:13 pm

ge1 wrote:
Sun Sep 09, 2018 12:54 pm
Valuethinker wrote:
Sun Sep 09, 2018 11:23 am
grok87 wrote:
Sun Sep 09, 2018 10:55 am
ge1 wrote:
Sun Sep 09, 2018 7:48 am
(Before everybody is telling me I shouldn't trade in options: The amount I'm speculating with represents a tiny portion of our net worth, much less than 1%. If I lose the whole amount, so be it. Call it financial curiosity or gambling, I know it's not investing.)

So my question is this: I would like to buy put options on tech high flyers such as AMZN, as I think they shares are massively overvalued. For anybody who has done this, at what strike price do you think I should buy the puts? I'm thinking fairly deep out of the money with expiration date June 2019 or even January 2020? For example I see January 2020 puts with a strike of 1,500 trading at 75.

Again, I realize this is not a regular bogleheads question, but given how financially literate this forum is, I'm sure a few of the esteemed members have dabbled in options in their prior / current life...

thanks
buying put options is a suckers bet. they are way overpriced.
Is this the "Volatility Smile" to which you are referring?

Or some more general property of Put options?

It makes sense that they should be overpriced in the case of Amazon. A company like Amazon will have a lot of connected parties like employees with huge capital gains but locked in for various reasons (insiders, capital gains tax etc.). Thus they will seek to buy Puts.
Employees wouldn't be allowed to buy put options on their stock holdings?
It's a good point that I had forgotten about.

Perhaps with those with large positions it may be possible to hedge those positions via an investment bank without tripping insider trading rules?

GrowthSeeker
Posts: 131
Joined: Tue May 15, 2018 10:14 pm

Re: Put Options

Post by GrowthSeeker » Sun Sep 09, 2018 3:41 pm

If you choose to do this, I think you should have a good idea of how much the value of your put will change per unit change in the price of the underlying. This will be different for different strikes and different expiration dates.

One place to start is to understand the delta (change of price of the option per change in the underlying).
Just because you're paranoid doesn't mean they're NOT out to get you.

mtbouchard
Posts: 101
Joined: Mon Oct 05, 2009 8:51 pm

Re: Put Options

Post by mtbouchard » Sun Sep 09, 2018 3:56 pm

I think understanding how Put Options work for OP could be instructive...and so long as its seen as a bet - which exactly what it is (although they can be useful forms of insurance).

I tried to short both GOLD and Snap in the past.

With Gold, I would have shorted but in the stead, used an 1x inverse ETF. That proved profitable as I happened to call the peak back in 2008?

With SnapChat...I did buy put options...I didnt quite understand the breakeven price point - its not the strike price, but the price - your premium, which can be substantial. Likely you already understand that. The main issue is: you can be right, but at the wrong time. Thats what happened when I bought put options for Snap at 15 about a year ago...they ended up expiring worthless since the date was last June. Now its at 10 and I would have profited significantly (10 contracts x 100 = $4k.)

So...you have to be very sure about when you think things will happen. Options are more useful when you KNOW you want something - like corn next year, or oil for your planes. As form of speculation Ive found it trying.

I have bought Call options as well..but even then buying outright seems more efficient...esp giving the power of momentum (if things go up suddenly..these days things seem to continue to go up).

Likely you would want something more complicated - like a straddle or collar - something to set parameters and since I dont know more than that Ill leave it there..but I would not buy just put options for speculation again.

Matt

fmhealth
Posts: 164
Joined: Tue Mar 25, 2008 10:24 am

Re: Put Options

Post by fmhealth » Sun Sep 09, 2018 4:32 pm

You may want to consider a S/L somewhere in the $50.00 range. This would protect you & offer some degree of cushion if AMZN moves significantly higher. Capital preservation & all that.

Be Well,
fmhealth

Theoretical
Posts: 1422
Joined: Tue Aug 19, 2014 10:09 pm

Re: Put Options

Post by Theoretical » Sun Sep 09, 2018 4:32 pm

The problem with puts is that the market is now pricing in the black swan-type scenarios you're describing. One of the ways Nassim Taleb made bucketfuls of money was because there was a gap between tail risk protection and the cost of insurance. There was a bit of a recent lull where being long volatility like this could be done on the cheap (before February 2018), but for now, they're priced to account for a sudden plunge into the abyss.

The Big Short-type epic puts and CDSs for 50 cents on the dollar on utter rubbish is not likely to return anytime soon.

inbox788
Posts: 5505
Joined: Thu Mar 15, 2012 5:24 pm

Re: Put Options

Post by inbox788 » Sun Sep 09, 2018 8:27 pm

Valuethinker wrote:
Sun Sep 09, 2018 11:23 am
grok87 wrote:
Sun Sep 09, 2018 10:55 am
buying put options is a suckers bet. they are way overpriced.
Is this the "Volatility Smile" to which you are referring?

Or some more general property of Put options?

It makes sense that they should be overpriced in the case of Amazon. A company like Amazon will have a lot of connected parties like employees with huge capital gains but locked in for various reasons (insiders, capital gains tax etc.). Thus they will seek to buy Puts.
The 1500 Jan 20 Put is 75. Meanwhile, the 2500 Jan 20 Call is 133 and 2800 is 78, so it looks like the calls are even more overpriced than the puts. The market is saying that neither event is likely to happen. A better bet if you think Amazon is going to fall from here is the 1800 Jan 20 Put for 170. If you think the event going to happen sooner, the 1800 Jun 19 Put at 125. If you are partly correct in your direction and timing, you can always roll your profits towards a later/lower target.

What's the date do you expect Jeff will be seen smoking weed? Then again, we might be seeing Amazon Now going up against Uber to see who can get to your doorstep faster.

Anyway, if you're really convinced about the move and timing, buy an at-the-money put for that month for the most straight forward play.

ge1
Posts: 325
Joined: Sat Apr 28, 2012 8:15 pm

Re: Put Options

Post by ge1 » Sun Sep 09, 2018 8:43 pm

Thanks for all the feedback, as always very impressed by the knowledge on this forum!

I have used puts late last year to hedge my wife’s RSU, which was vesting in the spring. (She no longer works there, but still has RSU with regular vesting periods.) That worked out great, as the stock seemed overpriced and I was happy to be able to lock in that price in any scenario. The stock dropped, and my gains on the puts more or less offset the loss in the shares, so all good.

I also tried a few non-hedge scenario, with mixed results. Some had gains of 40-50% and one position I lost more than 50%. All in all basically flat.

I just looked at the trades and one thing I noticed was that the prices seemed odd at times. For example I closed out a NFLX long put at point with the shares trading around 380 and a few weeks later was able to buy the put at the same price I closed out the position - even though the shares were 7 or 8% lower... So I guess not being able to independently validate the prices is a risk (and trust me, I don’t have the time nor the interest to do that).

@inbox - I will look at the options you mentioned. I’m not willing to spend more than 10k max on options, so the 170 put won’t work. And obviously I’m not certain about anything :D

nyclon
Posts: 296
Joined: Fri Oct 02, 2015 5:30 pm

Re: Put Options

Post by nyclon » Sun Sep 09, 2018 9:15 pm

ge1 wrote:
Sun Sep 09, 2018 7:48 am
(Before everybody is telling me I shouldn't trade in options: The amount I'm speculating with represents a tiny portion of our net worth, much less than 1%. If I lose the whole amount, so be it. Call it financial curiosity or gambling, I know it's not investing.)

So my question is this: I would like to buy put options on tech high flyers such as AMZN, as I think they shares are massively overvalued. For anybody who has done this, at what strike price do you think I should buy the puts? I'm thinking fairly deep out of the money with expiration date June 2019 or even January 2020? For example I see January 2020 puts with a strike of 1,500 trading at 75.

Again, I realize this is not a regular bogleheads question, but given how financially literate this forum is, I'm sure a few of the esteemed members have dabbled in options in their prior / current life...

thanks
Once you figure out which strike you'd like to choose, you can decide if you'd like to range bound your trade by adding a short put coupled with your long put. This structure, named a put spread, can significantly reduce your cash outlay if you're willing to give up some upside.

alex_686
Posts: 3851
Joined: Mon Feb 09, 2015 2:39 pm

Re: Put Options

Post by alex_686 » Sun Sep 09, 2018 9:24 pm

Theoretical wrote:
Sun Sep 09, 2018 4:32 pm
The problem with puts is that the market is now pricing in the black swan-type scenarios you're describing. One of the ways Nassim Taleb made bucketfuls of money was because there was a gap between tail risk protection and the cost of insurance. There was a bit of a recent lull where being long volatility like this could be done on the cheap (before February 2018), but for now, they're priced to account for a sudden plunge into the abyss.

The Big Short-type epic puts and CDSs for 50 cents on the dollar on utter rubbish is not likely to return anytime soon.
I will slightly disagree with Theoretical. I don't think anybody has yet to figure out how to tail pricing yet. It is mostly gut feelings with some math.

I worked on the margin and option desk during the dot.com boom and bust. If I were to speculate this is how I would do it. Don't short.

ge1
Posts: 325
Joined: Sat Apr 28, 2012 8:15 pm

Re: Put Options

Post by ge1 » Fri Oct 05, 2018 11:30 am

I decided to keep it simple and bought NFLX put options expiring in June 2020 with a strike of 250 yesterday. I got them for $20.50 - which doesn’t seem expensive given the relatively long time hortizon and the volatility of the stock.

Not to pretend I did a thorough analysis, but I read the lastest 10-Q of Netflix and it seems astonishing to me that a company with negative 500m free cash flow a quarter should be worth 160b :shock:

Starfish
Posts: 268
Joined: Wed Aug 15, 2018 6:33 pm

Re: Put Options

Post by Starfish » Fri Oct 05, 2018 11:59 am

Valuethinker wrote:
Sun Sep 09, 2018 11:23 am
grok87 wrote:
Sun Sep 09, 2018 10:55 am
ge1 wrote:
Sun Sep 09, 2018 7:48 am
(Before everybody is telling me I shouldn't trade in options: The amount I'm speculating with represents a tiny portion of our net worth, much less than 1%. If I lose the whole amount, so be it. Call it financial curiosity or gambling, I know it's not investing.)

So my question is this: I would like to buy put options on tech high flyers such as AMZN, as I think they shares are massively overvalued. For anybody who has done this, at what strike price do you think I should buy the puts? I'm thinking fairly deep out of the money with expiration date June 2019 or even January 2020? For example I see January 2020 puts with a strike of 1,500 trading at 75.

Again, I realize this is not a regular bogleheads question, but given how financially literate this forum is, I'm sure a few of the esteemed members have dabbled in options in their prior / current life...

thanks
buying put options is a suckers bet. they are way overpriced.
Is this the "Volatility Smile" to which you are referring?

Or some more general property of Put options?

It makes sense that they should be overpriced in the case of Amazon. A company like Amazon will have a lot of connected parties like employees with huge capital gains but locked in for various reasons (insiders, capital gains tax etc.). Thus they will seek to buy Puts.
It's generally not allowed to by puts or short stock as an employee.
I don't think is illegal but is in the contrac/code of counduct etc. And for a good reason.

ProfWengen
Posts: 19
Joined: Sat Oct 06, 2018 9:15 pm

Re: Put Options

Post by ProfWengen » Sat Oct 06, 2018 10:27 pm

Options are a tough game to get into as the timing component becomes a lot more important. I've been right a few times and still managed to lose money in options. I recommend reading up on the greeks before you do any options trading. Selling options is generally the smarter move, but your portfolio is liable to self-destruct if you don't know exactly what you're doing.

hdas
Posts: 229
Joined: Thu Jun 11, 2015 8:24 am

Re: Put Options

Post by hdas » Thu Oct 11, 2018 2:50 pm

ge1 wrote:
Sun Sep 09, 2018 7:48 am
(Before everybody is telling me I shouldn't trade in options: The amount I'm speculating with represents a tiny portion of our net worth, much less than 1%. If I lose the whole amount, so be it. Call it financial curiosity or gambling, I know it's not investing.)

So my question is this: I would like to buy put options on tech high flyers such as AMZN, as I think they shares are massively overvalued. For anybody who has done this, at what strike price do you think I should buy the puts? I'm thinking fairly deep out of the money with expiration date June 2019 or even January 2020? For example I see January 2020 puts with a strike of 1,500 trading at 75.

Again, I realize this is not a regular bogleheads question, but given how financially literate this forum is, I'm sure a few of the esteemed members have dabbled in options in their prior / current life...

thanks
Did you end up making a killing?

manuvns
Posts: 657
Joined: Wed Jan 02, 2008 2:30 pm

Re: Put Options

Post by manuvns » Thu Oct 11, 2018 2:59 pm

ge1 wrote:
Sun Sep 09, 2018 7:48 am
(Before everybody is telling me I shouldn't trade in options: The amount I'm speculating with represents a tiny portion of our net worth, much less than 1%. If I lose the whole amount, so be it. Call it financial curiosity or gambling, I know it's not investing.)

So my question is this: I would like to buy put options on tech high flyers such as AMZN, as I think they shares are massively overvalued. For anybody who has done this, at what strike price do you think I should buy the puts? I'm thinking fairly deep out of the money with expiration date June 2019 or even January 2020? For example I see January 2020 puts with a strike of 1,500 trading at 75.

Again, I realize this is not a regular bogleheads question, but given how financially literate this forum is, I'm sure a few of the esteemed members have dabbled in options in their prior / current life...

thanks
may be you are better off buying put option for something overblown like Tilray ( TLRY) , pure speculation . AMZN has massive business and still growing

long_gamma
Posts: 231
Joined: Mon Sep 14, 2015 4:13 pm

Re: Put Options

Post by long_gamma » Thu Oct 11, 2018 4:45 pm

Mostly Index puts are overpriced, but single name puts are not as overpriced as index put premiums.

Even above referenced paper states similarly. "The ex ante premium between implied volatility and realized volatility has almost always been positive for S&P 500 Index options, giving an edge to option sellers (Figure 2). This positive gap has been more consistent for equity index options than for individual stocks"

In fact DIspersion trading concept is based on the above premise. Selling index puts and buying underpriced single names within that basket.
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

ge1
Posts: 325
Joined: Sat Apr 28, 2012 8:15 pm

Re: Put Options

Post by ge1 » Thu Oct 11, 2018 5:23 pm

hdas wrote:
Thu Oct 11, 2018 2:50 pm
ge1 wrote:
Sun Sep 09, 2018 7:48 am
(Before everybody is telling me I shouldn't trade in options: The amount I'm speculating with represents a tiny portion of our net worth, much less than 1%. If I lose the whole amount, so be it. Call it financial curiosity or gambling, I know it's not investing.)

So my question is this: I would like to buy put options on tech high flyers such as AMZN, as I think they shares are massively overvalued. For anybody who has done this, at what strike price do you think I should buy the puts? I'm thinking fairly deep out of the money with expiration date June 2019 or even January 2020? For example I see January 2020 puts with a strike of 1,500 trading at 75.

Again, I realize this is not a regular bogleheads question, but given how financially literate this forum is, I'm sure a few of the esteemed members have dabbled in options in their prior / current life...

thanks
Did you end up making a killing?
Given I only invested a small amount, a "killing" was unfortunately out of the question :D , but I'm probably up somewhere around 30-40%. I ended up buying Netflix puts with a strike of 250 and expiration date June 2020. I realized some gains yesterday late in the session.

I realized though that the profits (and obviously risks) are much bigger for deep out of the money options, so I added a small position in QQQ (Nasdaq) put options with expiration in March 2019 and a strike of 130 and another Netflix put with a 200 strike.

Again, this is really mostly entertainment and education. Total amount invested in less than 1/3% of my investable assets.

GrowthSeeker
Posts: 131
Joined: Tue May 15, 2018 10:14 pm

Re: Put Options

Post by GrowthSeeker » Fri Oct 12, 2018 8:09 am

ge1 wrote:
Sun Sep 09, 2018 7:48 am
(Before everybody is telling me I shouldn't trade in options: The amount I'm speculating with represents a tiny portion of our net worth, much less than 1%. If I lose the whole amount, so be it. Call it financial curiosity or gambling, I know it's not investing.)

So my question is this: I would like to buy put options on tech high flyers such as AMZN, as I think they shares are massively overvalued. For anybody who has done this, at what strike price do you think I should buy the puts? I'm thinking fairly deep out of the money with expiration date June 2019 or even January 2020? For example I see January 2020 puts with a strike of 1,500 trading at 75.

Again, I realize this is not a regular bogleheads question, but given how financially literate this forum is, I'm sure a few of the esteemed members have dabbled in options in their prior / current life...

thanks
My recommendations for in (in no particular order)
1. Learn way more about options than you currently know.
2. I think that specifically understanding the Greeks will help the most at answering the question about what strike price and what expiration date.
3. Consider getting an account where you can trade "paper money": TDA has a platform called thinkorswim that not only lets you trade in paper money but also gives you option friendly data
Just because you're paranoid doesn't mean they're NOT out to get you.

sco
Posts: 790
Joined: Thu Sep 24, 2015 2:28 pm

Re: Put Options

Post by sco » Fri Oct 12, 2018 9:31 pm

If its under 1% of your portfolio, why bother? Is this for educational value?

User avatar
watchnerd
Posts: 1428
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Put Options

Post by watchnerd » Sat Oct 13, 2018 12:54 am

Put options are fun.

Especially if you and a friend take opposite sides of a position -- like a geeky financial bar bet.

The couple hundred bucks I've lost on puts were amazingly valuable object lessons in the difficulty of market timing.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

Post Reply