Using LEAP Puts as insurance

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ppnewbie
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Using LEAP Puts as insurance

Post by ppnewbie » Tue Feb 15, 2022 4:05 pm

Does anyone know of good tutorials on Long Term Puts. I priced out two year puts on 1 contract for SPY and it was approximately 4400 per contract. Only thing is I have no idea what the hell I am doing. I don't know if I can choose any contract if I like want to choose that price. Do I have to worry about open interest and other things that I am unaware of?

The problem is most youtube videos on this subject, are based on investing in long calls (leaps). The other thing I dont know, is that they are referred to everywhere as LEAPS but my broker just has puts with a two year expiration date. Is that the same thing? Also, can I do this safely without owning SPY?
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Mark Leavy
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Re: Using LEAP Puts as insurance

Post by Mark Leavy » Tue Feb 15, 2022 9:55 pm

ppnewbie wrote:
Tue Feb 15, 2022 4:05 pm
Does anyone know of good tutorials on Long Term Puts. I priced out two year puts on 1 contract for SPY and it was approximately 4400 per contract. Only thing is I have no idea what the hell I am doing. I don't know if I can choose any contract if I like want to choose that price. Do I have to worry about open interest and other things that I am unaware of?

The problem is most youtube videos on this subject, are based on investing in long calls (leaps). The other thing I dont know, is that they are referred to everywhere as LEAPS but my broker just has puts with a two year expiration date. Is that the same thing? Also, can I do this safely without owning SPY?
You seem like you're seriously looking for a safe hedge. I respect that. With that in mind, any advice you get on option trading from a youtube video will not be in your favor. Options work like any other asset. If you have inside knowledge, they can be a good thing. If you don't, the asymmetric odds will have unity long term utility, with the friction working against you.

If you have a strong, informed opinion about the future then a LEAP put hedge could work for you. But if your opinion is that strong, why not just reduce your exposure?

There is no right answer, but do consider that everything is fairly priced, and that as a retail investor you can hedge your bets by doing simpler things. LIke reducing your exposure.
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Re: Using LEAP Puts as insurance

Post by Mark Leavy » Tue Feb 15, 2022 10:08 pm

ppnewbie wrote:
Tue Feb 15, 2022 4:05 pm
Does anyone know of good tutorials on Long Term Puts. I priced out two year puts on 1 contract for SPY and it was approximately 4400 per contract. Only thing is I have no idea what the hell I am doing. I don't know if I can choose any contract if I like want to choose that price. Do I have to worry about open interest and other things that I am unaware of?

The problem is most youtube videos on this subject, are based on investing in long calls (leaps). The other thing I dont know, is that they are referred to everywhere as LEAPS but my broker just has puts with a two year expiration date. Is that the same thing? Also, can I do this safely without owning SPY?
Just re-read your post. Here's some background.

LEAPs and 2 year options are the same thing. Any option with an expiration approaching a year or more is a LEAP. Forget it. The name doesn't mean a thing. All options work the same. Near or far term. The pricing is based on the current volatility and the time decay and the price of the underlying. Options that are farther out have more time decay in the price. That's it. Otherwise they are the same.

Harry Browne had some great advice that you shouldn't invest in things that you don't understand. It seems that you have taken that to heart and you are looking to understand how options work. I applaud that. You tube videos and internet searches probably won't get you there. Options are fascinating. There are many hidden options in life with favorable odds. But the ones in the stock market are so finely tuned that they are useful only as quality tools for a master mechanic.
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Re: Using LEAP Puts as insurance

Post by ppnewbie » Tue Feb 15, 2022 10:17 pm

Mark Leavy wrote:
Tue Feb 15, 2022 9:55 pm
ppnewbie wrote:
Tue Feb 15, 2022 4:05 pm
Does anyone know of good tutorials on Long Term Puts. I priced out two year puts on 1 contract for SPY and it was approximately 4400 per contract. Only thing is I have no idea what the hell I am doing. I don't know if I can choose any contract if I like want to choose that price. Do I have to worry about open interest and other things that I am unaware of?

The problem is most youtube videos on this subject, are based on investing in long calls (leaps). The other thing I dont know, is that they are referred to everywhere as LEAPS but my broker just has puts with a two year expiration date. Is that the same thing? Also, can I do this safely without owning SPY?
You seem like you're seriously looking for a safe hedge. I respect that. With that in mind, any advice you get on option trading from a youtube video will not be in your favor. Options work like any other asset. If you have inside knowledge, they can be a good thing. If you don't, the asymmetric odds will have unity long term utility, with the friction working against you.

If you have a strong, informed opinion about the future then a LEAP put hedge could work for you. But if your opinion is that strong, why not just reduce your exposure?

There is no right answer, but do consider that everything is fairly priced, and that as a retail investor you can hedge your bets by doing simpler things. LIke reducing your exposure.
As it is abundantly clear in my post, I am very clueless about this. But if I buy 10 contracts for a 2 year put on SPY at 440 that cost me 40k. I am basically protecting 446k of SPY for about 40k, correct? I would really like to keep my stocks riding for as long as possible or get a payout and buy more during a crash. It might be worth it to me, even if it costs me 40(ish)k. Unless, I am thinking about this completely wrong.

Anyway thanks for the feedback.
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Re: Using LEAP Puts as insurance

Post by Mark Leavy » Tue Feb 15, 2022 10:25 pm

ppnewbie wrote:
Tue Feb 15, 2022 10:17 pm
As it is abundantly clear in my post, I am very clueless about this. But if I buy 10 contracts for a 2 year put on SPY at 440 that cost me 40k. I am basically protecting 446k of SPY for about 40k, correct? I would really like to keep my stocks riding for as long as possible or get a payout and buy more during a crash. It might be worth it to me, even if it costs me 40(ish)k. Unless, I am thinking about this completely wrong.

Anyway thanks for the feedback.
You are correct. Nothing wrong with that at all. $40K of insurance is fairly priced. If SPY ends up below 400 in 2 years you come out ahead. If not, you are behind. It's a market.
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Re: Using LEAP Puts as insurance

Post by ppnewbie » Tue Feb 15, 2022 10:45 pm

The other question is how critical is it to own the underlying stock? I own a junk yard of stocks that basically equal SPY but…it is not SPY. Is the put insurance in itself with its price appreciation or is being able to exercise the option the insurance? Sorry for these annoying questions!
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Re: Using LEAP Puts as insurance

Post by Mark Leavy » Wed Feb 16, 2022 8:34 am

If you have a mix of stocks that generally move (in aggregate) along with SPY, then puts on SPY are fine insurance if you are trying to protect against a crash. You don't need to hold SPY specifically. I assume that if the market crashed, you would cash out the puts, since you wouldn't be holding any SPY to put to the person on the other side of the option trade.
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Re: Using LEAP Puts as insurance

Post by I Shrugged » Wed Feb 16, 2022 10:53 am

Disclaimer: I know next to nothing about options.

9% seems like a steep insurance premium for a year or two. How much coverage does it buy? If your "SPY" goes down 50%, how much will the options generate?
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Re: Using LEAP Puts as insurance

Post by ppnewbie » Wed Feb 16, 2022 11:35 am

I Shrugged wrote:
Wed Feb 16, 2022 10:53 am
Disclaimer: I know next to nothing about options.

9% seems like a steep insurance premium for a year or two. How much coverage does it buy? If your "SPY" goes down 50%, how much will the options generate?
If SPY went down 50% the option would be worth ~220k I think. I am actually going to call my broker and ask lots of dumb questions.
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Re: Using LEAP Puts as insurance

Post by ppnewbie » Wed Feb 16, 2022 11:43 am

Mark Leavy wrote:
Wed Feb 16, 2022 8:34 am
If you have a mix of stocks that generally move (in aggregate) along with SPY, then puts on SPY are fine insurance if you are trying to protect against a crash. You don't need to hold SPY specifically. I assume that if the market crashed, you would cash out the puts, since you wouldn't be holding any SPY to put to the person on the other side of the option trade.
Question about NOT owning the underlying stocks. Hypothetical numbers:

If SPY currently trading at 440. I purchased 10 long puts on the SPY with a strike price of 440 for $44,000. Say SPY went to 220. If I owned the underlying stock, I could exercise the option and sell the stock for 440k (10 contracts = 1000 shares).

But...If I did not own the underlying stocks and just owned the contracts. I would depend on someone wanting to buy 10 long puts at 440 for 220k. I am trying to understand why someone would want to take the other end of my trade. I does not make sense to me. I have heard of the term "Open Interest" When the SHTF, I need to figure out if there would be any open interest left in the bag I am holding.

Does anyone know how to monitor the actual liquidity of these contracts, especially during chaos?
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Re: Using LEAP Puts as insurance

Post by ppnewbie » Wed Feb 16, 2022 1:10 pm

This is what I am looking for:
Screen Shot 2022-02-16 at 11.08.23 AM.png
Screen Shot 2022-02-16 at 11.08.23 AM.png (175.3 KiB) Viewed 2185 times
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Re: Using LEAP Puts as insurance

Post by I Shrugged » Wed Feb 16, 2022 3:44 pm

Can you be subject to margin calls on these?
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Re: Using LEAP Puts as insurance

Post by ppnewbie » Wed Feb 16, 2022 4:37 pm

I don't thinks on the Options contract stuff purchased with cash. The three outcomes I believe are:

You sell the option
You exercise the option - IE sell the stock to the counter party at the agreed upon price.
The option expires and you lose the money you paid.

I am researching a company called Convexitas at the moment to see what they can offer.
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