Cashing in on LEAPS putsgreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
I am considering buying S&P 500 LEAPS puts or other puts presuming that if the markets drop, these will appreciate substantially. I feel that this investment holds the best reward/risk ratio for a wide range of negative Y2K outcomes.
Some threads I've seen here indicate in the case of market meltdown, I may not be able to collect my gains. Can someone elaborate on what is behind this? I've noticed that the open interest on puts exceeds the calls. How far can the underlying stock or index's value fall before the vast majority original put sellers would become insolvent and default? 50% ? 70% ? 90% ? It would be a shame to take the risk, have a 10-fold increase, and not be able to collect. I saw a thread from the gold folks in the fall who seemed to make an analysis of open interest and identified a similiar precarious situation at that time. What (if any) kind of government intervention might occur that would affect my ability to sell at full value? If its any help, the particular S&P LEAPS I am looking at are the DEC2000 or DEC2001 strike=130. I buy the options on-line through Brown & Company.
One other question. Which S&P puts that expire in 9 mo. to 2 years from now can be exercised at any time (American style)? Would that help for liquidity when I want to sell? (I've never exercised options, only sold to close.) Are they on a certain exchange? Symbols?
Any comments would be much appreciated.
-- Joe Trysner (firstname.lastname@example.org), December 25, 1999
Personally, I'd put it into metals directly. You should be guaranteed to get at least what you put into back out, hopefully many times over. I'm afraid I don't know the answers to the specific LEAPS questions - but the risk in the current market in any shape is beyond my taste. Keep in mind - what is about to occur is UNPRECEDENTED. Who knows what will happen, what the govt might do, etc.
There's a lot of discussion that Monday, January 3rd has a high potential be a big sell-off if there's any weekend rollover issues. This is largely because so many people made large capital gains this year, so they'd sooner have it occur on next year's taxes.
Friday, 12/31 is New Year's Eve - and I assume the markets will all be open, correct? Australia will rollover at roughly 8AM Eastern Time (US). Asia shortly thereafter. What happens if nasty reports start coming from those regions? Big Wall Street sell-off, one business day early - and the people who intended to wait may also bail as their profits appear to be flushing down the commode.
So, if the US markets are indeed open on Friday, 12/31, this oughta be quite an "exciting" day, in more ways than we can fathom...
-- Ford Prefect (email@example.com), December 25, 1999.
The risk you refer to, that of being right but not being able to collect, is called "counter party risk". For listed options (the S&P LEAPS/puts or regular index puts are all "listed options") that risk is so small that it should be discounted entirely (IMO).
A greater risk, again IMO, is that the market simply closes. But that's quite doomerish and *everyone* else would tell you that this is not a risk at all.
All CBOE listed S&P options (including LEAPS) are American style, though a quick trip to http://www.cboe.com will enable you to verify this.
I don't think you'll want to excercise. You'll want to sell. So the exercise style doesn't really matter.
I would not buy the 130's. Certainly would not buy anything with a strike price above 110. Too much premium. Premiums peak on options 'near money'. The max risk is, of course, the premium paid. If you anticipate a meltdown, why not save the cash or buy more by going with a cheaper put? Others have a different opinion, as they wish to be able to get out if the trade goes against them. The puts further out of the money tend to have much bigger spreads (bid vs. ask) and their value degrades more quickly as the market moves away from the strike price.
FWIW, I have been buying 110's and 90's, all in the LSZ class. If you want to go with something even more speculative, check out nearer term puts on some of the real high fliers. If the market crashes between now and March (as I believe it will) there are opportunities to make 50x - 100x your money.
-- Me (firstname.lastname@example.org), December 25, 1999.
I have soaked up those LSZ leap puts and seen them decline drastically in value. I will not sell ANY of them, just because the market is so optimistic. A LOT will change before Dec 2000. They are priced mainly by market SENTIMENT. NOW is an excellent time to buy them. Watch their prices and put in LIMIT orders. On Friday, some sucker was screwed by overpaying $1,500 for 5 LEAPS (LSZXF.) You can still see the trade on Quote.com.
-- W (email@example.com), December 25, 1999.
(p.s. I only think I know what I'm talking about here. Caveat emptor.)
We're so close to the rollover that there's probably no need to go for LEAPS, just buy regular puts. It makes more sense to go for quick profits from the rollover shock, rather than be waiting around months for you puts to get in the money. This way, you could take some of the winnings out asap, and turn them into physical wealth, and you could leave the rest in the market to gamble on further big movements whch us GI's might be more aware of. A "hit it and quit it" approach would make more sense too if you're seriously worried about counter-party risk, or about Dow-none-thousand.
To my mind, the best index puts would be those on the MEX index, traded at Chicago. This index is composed of 10 Mexican companies...investment, transport, telecoms, tv stations etc. How good a job do you think Mexico has done on y2k??? The Mex index has risen from 75 to 111 in the last two months - maybe not quite bubblemania, but it's certainly irrational exuberance.
These put options are very cheap, and a not that far out of the money to begin with....
MEXMS - January, strike price 95...ask = 1/2. i.e $47.50 plus brokerage.
MEXNR - February, strike price 90...ask = 5/8. i.e. $62.50 plus brok.
I'm prefering the Feb's, because 8 or so weeks seems like plenty enough breathing time for a major crash in this index, but it's still soon enough (maybe) to collect and put these winnings to good use. But my real hit-it-and-quit-it strategy involves oil futures options ala Andy, and I'm looking to MEX as a surer thing.
If there was a 50% decline in the MEX index in January, then the Jan puts would make you something like 48 times your outlay, (assuming brokerage of $35 per put.) If there was an 80% decline by end* of Feb, (far-out, but not impossible), then the Feb puts would make you 58 times your money. A mere 50% decline by feb, and these feb's would pay off at approximately 35 times your outlay.
Commodities futures (esp. oils) are a better bet again, but I'll leave it for Andy to explain that game.
Whataya got to lose? ;~)
(While some may find this all distasteful and ghoulish, - and sometimes i do - it's worth realising that a dollar in your hands is MUCH more likely to help people through year 2000, than would be the case if that dollar remained with Chase or Morgan or whoever.)
and me numbers might be totally up the wazoo.
-- number six (firstname.lastname@example.org), December 25, 1999.
Take a look at the Profunds Ultra Bear fund. You will make double whatever the S&P 500 does. If it goes down 20%, you make 40%. If down 50%, you make 100%. No time limit. Be sure to get the bear, rather than the bull. The bull works the same, but bets the other way. Just type ProFunds in the search box.
-- Earl (email@example.com), December 25, 1999.
Here's another idea. Pan-American Silver (PAAS) currently priced 5 9/16. PAAS counts Bill Gates and Prudent Bear amongst it's major investors. PAAS June call options at strike price of 5 cost only 1 7/8 i.e. $9.37. I don't find it too hard to imagine their shareprice might be 20 by June,
(assuming the shareprice of a well-regarded silver company will rise at a greater rate than the actual price of silver will. Although a lot of money will go to money heaven, there will still be lots of money looking for a safe-haven. It's also conceivable that there might be huge capital inflows into USA if it's y2k-okish, while elsewhere is screwed. )
Buying call options on this company seems a bit safer than playing in the silver commodities market, which is apparently a bit dodgy, (according to some things I've read), i.e. many more paper claims to the stuff than is actually available for delivery...it could get fubar?
The sense, or otherwise, of this trade depends on how much brokerage you'll have to pay. If you have to pay a flat rate, e.g. $30 or $35 per contract, then this play isn't worth it. But if your broker offers cheaper rates for buying many contracts at a time, then this can be a great opportunity. I would not recommend E-trade in a pink fit, but using their brokerage fees scale, I'll show how cushy this play could be....
Etrade charges $1.75 per contract, plus $20 dollars, (min $29 per transaction.) 1000 June calls, at strike price of 5, asking price is 1 7/8..$9.37 + $1.75 brokers fees = $11.12 each. 1000 contracts cost $1112, + $20 = 1132. If PAAS price is 20 by late June, each contract will be worth $1500. $1,132 outlay, $150,000 return, = 132 times your money.
Might be worth a go.
This might be a great gamble to go for after you've cashed in on the immediate post-rollover oil price explosion....maybe silver and silver companies won't head for the skies for a few weeks or months, especially with the general "sell, sell, sell!" mood that one would expect to see in equities markets.
p.s., I think the maths is correct, but I'm new to all this and I might have a fatally false premise in there somewhere...GIGO.?
-- number six (Iam_not_a_number@hotmail.com), December 26, 1999.
correction : where I've said "1000 contracts" make that 100, and then the rest flows. If you bought 1000 it would cost $11140, and return $1.5M, asumming all those other things.
-- number six (!@!.com), December 26, 1999.
I believe Pan American's chief asset is a silver mine in Russia. Need I say more? Hardly a good investment (if correct) for a GI.
-- Me (firstname.lastname@example.org), December 26, 1999.
Lots of interesting/helpful comments. Thanks for the replies. Another question: What are your exit strategies (assuming you are 50%-100% invested in defensive options) under the following four limited impact scenarios:
(1). No significant Y2K problems manifested as of Jan 30. Market is up 10 percent from Dec 31 close.
(2). No significant Y2K problems manifested as of Jan 30. Market is down 10 percent due to tax selling or normal correction.
(3). Infrastructure stable. Complicated rolling failures and fixes of business processes due to Y2K. Market down 40% as of Jan 30.
(4). Same as (3) but market mania continues and market is unchanged.
-- Joe Trysner (email@example.com), December 26, 1999.
joe - please bear in mind the following...
Gonna ramble a bit here, but there is much to discuss. What is sticking in my mind are some of the comments made to R. Reagan's GRACE COMMISION in the 1980's. The Commission members interviewed the leading financial experts and government finance personalities in many of the South American countries. When the Commision asked, "How long did it take your economy to go from a state of normalcy to hyperinflation?" the answer was, "One week".
"One week", think about it! We have just gone through an 18 year bull market for bonds and stocks. Commodity inflation has not been much of a problem during this period. In fact commodity prices have been remarkably stable in spite of record money creation by the Fed and the banking system. They have been stable dispite the fact there exists a massive and rapidly increasing amount of $US currency in circulation throughout the world. It even more remarkable that commodity prices have remained under control given the enormous float of counterfiet currency in circulation (estimated at between 10-20% of the total currency float).
The commodity complex has been a relatively unattractive investment compared to bonds and equities over the past 2 decades. The lack of investment/speculative interest can partially explain this lackluster performance as can the disinflationary policies of the last real central banker, Paul Volker. Manipulation is one other means of suppressing prices. The commodity complex has recently been showing signs of life while also giving us glimpses of a massive secret campaign to keep commodity prices in check. The best illustration is the blatant manipulation of the gold market. (please refer to www.lemetropolecafe.com for detail). Last week it was disclosed that in an attempt to keep the price of palladium in check (a price increase of any precious metal will spill over into the others) the US Government has liquidated virtually its entire stockpile of this very strategic metal. Now Russia remains virtually the lone supplier of palladium to the world market. Incredible!
No doubt the same powers are working overtime to keep the oil complex in check. It is a losing battle IMHO and this is being reflected in the bizzare behavior and statements being made by Richardson, Clinton and the rest. In fact, they have already lost the war (how do you fight a insoluble computer design error?) we just don't know it yet.
Indeed, I believe the Y2K problem will be the tripwire that releases the shackles from commodity prices and ushers us down the nasty and demoralizing road to hyperinflation. It will most likely start in the oil complex and rapidly spread to all other real commodites. This process should start within the next three weeks and keep going for years. Remember, it took the SA countries only 1 week to go from normalcy to hyperinflation.
Why? It is so simple. The lack of energy and a breakdown in the JIT process will severely impare our ability to create and process/refine new supplies of commodities. The exisiting stockpiles instantly become very very valuable as future deliveries are suspect. If your orginazation intends to remain in existance, it must stockpile all necessary supplies IMMEDIATELY. No choice in this matter! Add to this the incredible amounts of bank created funds and currency in circulation , what will stop this great price expolsion?
So as a civilization here we sit, going into the last year of the millenium largely ignorant and complacent about the economic ramifications of Y2K. We are in love with our grossly inflated paper assets and all the toys (SUV's etc.) they bring us. Things are so good, we cannot imagine bad times and we will not listen to any objective voices of caution. Technology has served us incredibly well and of course we humans have complete control over our high tech! - or do we? Boy are things going to change - and fast!
Likes: 1. gold coins 2. junk silver coins 3. 2-4 week deposits 4. Unhedge gold producers and junior golds 5. Commodity based companies
Dislikes: 1. bubble stocks (the whole high tech complex) 2. deposits and bonds with a maturity of greater than 1 month
More than anything else, I believe that liquidity is your friend.
"A commodity in hand is infinitely more valuable than a promise to deliver." Y2K mantra
-- Andy (2000EOD@prodigy.net), December 26, 1999.
Exit strategy for LSZ type LEAPS (SPX Dec 2000 puts).
Will sell only if markets down 40% by end of Jan. And then probably re-purchase some time later. There is lots of time til Dec2000!
If markets do not recover significantly from such EARALY low, the LEAPS will have done their thing! If they do recover I would re- invest some of the money in same LEAPS again, because I would expect a second dip later, when long term Y2k effects show up and get processed by the "analysts".
-- W (firstname.lastname@example.org), December 26, 1999.
Yes Me, that's quite a hole in my Pan-Am theory! Back to the drawing board.
-- number six (!@!.com), December 26, 1999.
so are you mofuls rolling in the dough or did you lose your asses? the forum wants to know
-- tellus (email@example.com), January 03, 2000.
If you'd spend a few minutes reading instead of trolling, you'd see that these options don't expire until December 2000 or December 2001. I don't think anyone here's a mogul yet on put options they might have bought in the last week, but I can't imagine anyone's lost their shirt either.
Check back in, say, six or nine months. Or not--I don't care.
-- Don (firstname.lastname@example.org), January 03, 2000.