Long term Dow puts for conservative investors:
I've been looking at the later expiry options on the Dow, and
noticed that the September future is trading at a premium to
cash so that you can buy the September 8800 put option for
such a low price that you will make money as long as the
Dow doesn't increase by then, and, of course, your option
will at least return something if the Dow ends below 8800.
Here are the prices etc, as of trading close today:
Symbol: DJXUJ
Sep 88 put, ASK: 14 1/8. (with 100x index ratio)
Thus a contract costs $1412.50. If the Dow stays at 7382,
the option will return 8800 - 7382 = $1418.00, slightly more
than the purchase price, before commisions, but after purchase
spread.
If we end up with a 30% bear market, and the Dow drops to
5740, the option returns 8800 - 5740 = $3060.00, for an
overall return of 116% or more than 200% annualized.
Note that it would be typical for a bear market to drop
the Dow something like 30% per year.
To do this trade, the novice will have to go and get their
account okayed for the purchase of options. I don't think
you can do this in your IRA.
This seems to me to be a pretty safe bet for a bear who doesn't
want to guess the short term market. Of COURSE, I am not
a financial adviser, much less one of the those who provides
advice that is always profitable.
p.s.
I think they should rename "Flight to Quality" as "Flight to Safety",
which is much more descriptive.
-- Carl |
