HOT TRADING STRATEGIES FOR A COLD MARKET
Daily Stock Market Equity and Options Trading Commentary

To get a better understanding of the option ideas expressed in this blog, buy my ebook today!

Tuesday, June 23, 2009

Feeling Bearish? Seek Protection with these 51 Option Ideas & Spreadsheet

Today is June 23, 2009 and I have read 5 text message alerts, 11 Facebook messages, 14 emails, several "tweets" on twitter, not to mention listened/watched several hours of doom and gloom in the past 12 hours. So is this doom and gloom real? Is the market due for a correction? I cannot answer these questions, but I do believe we'll have some sort of pull-back in the month or so to come, especially now with all the doom and gloom talk creeping back up everywhere.

In this article I will lay out 51 option ideas, which will help hedge your portfolio against the downside. These ideas all require using the Bear Put Option Spread Strategy.

The 51 stocks used in this article are the stocks with the current highest market cap in the S&P 500 (I meant to crunch the data for the top 50, but realized I have data for 51, but an extra stock can't hurt, right?). To get a detailed spreadsheet of all 500 stocks, which will allow you to rank them based on their market cap minute by minute with the click of a mouse check out my blog post "S&P 500 Stocks Spreadsheet".

The objective of this article is to protect any of these stocks by purchasing Put protection, but protecting the stock all the way to zero, may seem pointless and expensive (especially for these 50 companies). Therefore this strategy allows you to protect them for a bit cheaper premium, and still providing at least 5% protection through July option expiration (assuming the higher strike price is hit and spread is filled from the table below). To learn more about the Bear Put Option Spread strategy, and option spreads in general check out my options E-Books.

The higher strike price from the table below is a bit lower from the current market price (excluding Lowe's (LOW), Comcast (CMCSA), Bank of America (BAC), and Amazon (AMZN) - stocks currently in the money), which won't allow you to 100% of the downside, but it won't lose as much money in case the market moves sideways or continues to rally over the next 25 days.

Below is a printable version of the S&P 51 (largest stocks by current market cap in S&P 500) which allows you to see company, ticker, higher strike price (put option purchasing), lower strike price (put option selling), % hedged if higher strike met and spread is filled, and % cost of hedge. I found the cheapest ways to open these spreads while still seeking at least a 5% hedge for the July expiration.

The spreadsheet below shows the ideas ranked in order from the cheapest stocks to most expensive stocks to purchase put protection on while still hedging at least 5% to the downside. To learn more about this option strategy, other option strategies, and options in general check out my option E-Books.

(click image to enlarge and print)


The higher strike is the option you'd be purchasing and lower strike you would be selling to complete the spread. This will allow you to hedge yourself cheaper, but will also limit the profit you can make from the downside. You'll most likely need to adjust the strike prices and expiration's accordingly, depending on how much you'd like to hedge your position and your opinion etc...

Although the risk is higher for these strategies, it is a great way to hedge your portfolio without selling your stock and waiting to buy it back for a lower price, as we all know we cannot time the market. As I became very bearish in August 2008, I had many of these strategies in place and it protected me greatly from the downside experienced in the following months. If you are very bearish you may want to buy the puts similar to these listed in this article without selling the lower strike option, this will allow you to hedge your stock all the way down to zero, but will also be a bit more expensive.


Bookmark and Share
Sphere: Related Content

2 comments:

geordie said...

hi marco -

An example of what you are suggesting is to purchase a near the money strike put, and then sell/write an out of the money strike put?

For example on Vale trading today at 17.23, so purchase put option with 17 strike, then sell put with 15 strike to receive some premium?

what about selling put options with out owning any underlying stock? what happens if the under lying price goes below the strike of the sold or written put option?

Thanks for the clarification.

Marco H said...

If you are very bearish I wouldn't sell the lower strike option, this will protect your stock all the way to 0 until expiration. However to get in a bit cheaper, you could sell the lower strike, the trade off is that you limit the downside protection from 17 to 15. If the stock drops below 15, anything below 15 will not be hedged from using this spread. If you sell the PUTS you'll be taking a risk, but I use this if I want a stock instead of placing a limit order. Example: If I sell a put on a stock for the 15 strike and lets say it is currently at 18, I take my premium of lets say $20 per contract, the stock drops to $10 share at expiration. I am still obligated to pay $15 for the shares even though it's at $10 and will lose $480 a contract. However if this happens you can always close the contract and sell puts on it for the following month for more and hope the stock rallies a bit. This method is known as "rolling" the option.

Hottest Blog Posts of All Time