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Strategies & Market Trends : Waiting for the big Kahuna
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To: ig who wrote (60681)11/3/2002 6:26:18 PM
From: mishedlo  Read Replies (2) of 94695
 
A hypothetical question:
Which DIA Nov put strike would give the max percentage gain if DIA were to fall from 85 to 75 in the next two weeks?

I have looked at a few historic Dow plunges to figure this out. My brief study suggests that a strike near the middle of the expected plunge pays off the best -- in this example, that would mean DIA Nov 80 puts.

Also, is there a commonly-known formula for this?

Thanks,

ig

There is no answer as worded IMO.
Do we slowly drift down to 7500 or do we spike down and stay down. DIA 75 puts would be a huge success if you bought tomorrow and we plunged to that lebvel in two-3 days.
They could be worthless if we chop around up here, then in the last two days plunge to that level. You get yet a third answer if we just steadliy drift down (but note they can and do suck out time premium on last days before the final plunge).

Thus if one expected a close at 7500 on expiry or during expiry week, a better question would be what DEC puts to buy.

Assume 7500 at expiry and play some games.
The 85's would be 10 points ITM and therefore worth maybe 12-14 or so at a cost of 3.70.

You could buy twice as many Dec 79 and they would maybe fetch 6-7, so I am not sure you accomplished much.

Somehow I would think something like the 82'2 would do it and those might be worth 9 or so and cost 2.50 vs 3.70.
So you could get 1/3 more for the money. If we really tanked as in 1500 points that would maximaize the payout. If we do not fall as much the ATM's or even ITMs would perform better.

There are ways to be more precise but Nov is impossible unless you provide more "assumptions", that better damn well be right.

I would not mess with NOV here at all (unless you expect an IMMEDIATE drop).

There are precice formulas with implied volatility and the like but I do not have them.

M
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