bradhouser

I used Thinkorswim's Thinkback feature. It shows closing quotes for dates going back some period of time. THe open interest was 2 for the 1445 SPX puts on 6/15.

To get at least a $925 profit with options one way would be with a Put with a delta of -1.00 On 6/15 the July monthly SPX 1445 Puts with a delta of -1 were asking 104.30. The same contracts were bid at 120.30 on 6/21, a difference of $16. If you bought one contract, if would cost $10,430, and you would sell it at $12,030, a $1600 profit. Lower strike prices would come closer to $925, 1380 would be close. If you are using options as a proxy for futures, you would want to minimize theta decay, the part of the option that reduces the extrinsic value over time. Deeper in the money puts or further out in time will do that, but the price of the investment goes up as does the spread.

Yes. Puts go up in value as the underlying goes down. Every strike price has an implied rate of return. When the Delta is 1.00 (deep in the money) you get $1 for each $1 the underlying drops. Divide $1 by the cost of the put and that is your rate of return. Looking at this there may be multiple strike prices where the delta is 1 so you would want the lowest cost one. If you take this further, you could calculate delta divided by cost for all the other strikes to see which has the highest ratio. You would then need to determine how many contracts you would need to buy to compare apples with apples for a given investment amount (e.g. $1000) and include commissions. Lower deltas will give higher returns, but you will need to buy more contracts, and the net return will drop due to higher commision costs. You also need to consider the spread, as you may only be able to buy at the ask and sell on the bid due to low open interest and liquidity. Using SPY options is safer than SPX, do to the low spread, but you need to buy more contracts than with SPX options. Yes. Sort of. The extrinsic value of the option drops every day by Theta, so the amount the underlying has to move increases in order to get the same profit. The stock could go down and you can still lose money if you hold it too long. If your platform graphs Profit/Loss vs. Underlying Price you can see not only the values at expiration (Max loss, breakeven, profit as a function of price) but also estimate the premium at various dates up to expiration. On Thinkorswim this is done in the Analyze tab. As you can see there is no simple answer. When buying Puts and Calls, you are making a direction and timing call. You have to be right on both.

Interesting post. BTW: Here is the correct URL: http://www.tradersstateofmind.com.