Anybody with PUT OPTION BUYING Experience?

[silverflake]

So I read this past week that Soros had started buying put options on the S&P500 as of late last year to the tune of $1.3 BILLION!!! So I thought, why don't I just buy a put option or two? Say on the SPY etf. But here's my naïve problem. I have good experience in SELLING covered calls and cash secured puts for income but when BUYING an option (a put), what do I choose? Not enough experience here.

Here's the main questions. If I am using SPY (the etf), how far out in months do I go? (I was looking at January 2015)

Also, do I buy in the money? At the money? Out of the money? How far out of the money (or in the money?)

Look, it's obvious Soros is hedging against what a lot of us sense is coming so I just want to try what the billionaires are trying. I will only use an amount of money I am willing to part with.

Any knowledge and help would be appreciated.

Keep stacking in the meantime.

[barrytrot]

My guess is that Soros and others are doing more than just one thing and generally the PUBLIC thing is the least important aspect of their strategy. So keep that in mind before following what you *think* the smart money is doing.

Regarding your answers it's a fairly straight forward math problem.

The only hard part is the actual value of SPY (or whatever) is unknown.

So you have to do some educated bounds guessing on that. Then compare:
- The maximum loss
- The maximum gain
- The expected loss
- The expected gain

at each of your strike prices and expiration periods you are considering.

Then you should see a couple that are mathematically better based on your assumptions and you move in on one or more of those.


Regarding buying puts in general This is one of the more risky strategies available to you as it involves 100% potential loss with no real "stop loss". That's not necessarily a reason to not do it, but you may want to consider safer moves because you can cut your loss rate down by 80% and only cut your gain rate down by 30% (or something similar to that).

Things to look into:
- Selling out of the money puts -> this is still a bet that the market goes down but if you are wrong and it goes up you win and if you are right and it goes down you also win. The only way you lose is if it goes down by a lot more than you anticipated which means you just "got in" at what you may consider a safe entry point. (Which is still a loss potentially, but one you may be comfortable with long term.)

- A spread -> Instead of buying the put at $100 (round number example) you buy the put at $100 and sell the put at $90. So your max gain is reduced to $10 but your cost (i.e. max loss) is now $3 (or something). So you are risking less to gain less, essentially.

- The other spread -> So you think it will go under $100 (again round number example) so you buy the Call Option at $100 and sell the Call at $90. So you gain money as long as it ends $90 or above. Below $90 you start to lose.


For all these you can do the math on:
- Max loss
- Max gain
- Expected max loss (based on your expected range)
- Expected max gain (based on your expected range)

Using all these numbers you can find 2 or 3 investment strategies to consider that are mathematically better than the others.

You may still lose, of course, but you will control your gains/losses much more easily this way.

[silverflake]

As usual, good info and good list of choices. Thanks barrytrot... will think long and hard about a trade. I was already of the mind set that I would only do it with money I would be willing to lose knowing that something like 88% of options expire worthless.

Regarding selling puts, I use this strategy often to generate income and to buy into stocks I like. However, I don't think I want to risk being 'put' into the underlying equity at this point. I will watch and listen for now.

Thanks again.
Keep stacking