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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: Earlie who wrote (195534)10/6/2002 10:11:32 AM
From: Tommaso  Read Replies (3) of 436258
 
>>> Buying puts that are very expensive is betting that a BK is near. So far, the evidence at hand supports the
continuance of a "grind-down" scenario rather than a BK. <<

Been studying your classic post again.

I continue to believe that LEAP puts on the Dow are the best way to bet against the market. It is also a way that gives a horizon of as long as two years for BK. And works fine if there is a slow grind down as well. Other people must have decided that, too, because what I call the "negative premium" is much smaller than it was. When I first got interested in these, they sold at 10% UNDER the actual value as measured by the current DJIA, because they are European style and cannot be exercised until expiration. This seemed to me a fantastic bargain, and it has proved to be so. I am still in the 140s of December 2003, but there are now 2004s available. I have not checked if they have a negative premium.

Just checked. The highest strike for the 2004 puts is 124 and the difference between the "fair value" and the quote is pretty small--about 2%.

quote.cboe.com

It was funny how one and two years ago I simply could not convince anyone that this "negative premium" existed. Anyone who replied to me --almost anyone-- would say "Oh that's just because options have premiums that represent the time value." It did not seem to register that this was a negative time value--that the sellers of the options were willing to bet on a Dow rising back well above 10,000. I guess the sellers were the "Dow-is-going to 40,000" believers.

I know that you are a little uneasy with options, and I realize that even the CBOE could default in a huge catastrophe. But so far so good, and I think I will hold these buggers until the Dow is below 6,000. Do wish I had bought a lot more.
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