Dennis,
>>>>>> Can you explain a little about your OEX spread? what expiration month? Are you buying both puts? Selling one buying the other? What effect does market going up versus going down have on it? <<<<<<<<<<
I bought the SEPT OEX 485's with average cost of 13, and sold the SEPT 470's for 8 3/4, so my cost basis is $4.25 with the possibility of making $10.75($15.00 - 4.25). The obvious benefit is that the risk/reward ration is very good.
The downside is that you reduce your profit.
I am simply holding this put spread since I strongly feel that we will retest the 7400 lows, by SEPT expiration. If the DOW gets to 7400 the OEX will be around 462, so I get almost the full 15 if we get to or below 7400 on expiration day.
If the market starts to run to the upside, I will start to lose money but at a slower pace than a straight put, since the 470's I sold will also go down in value.
A put spread also gives me options - if I really feel that the market will tank, I can always buy back my the 470's.
There are alot of variable with working with spreads, so it is not as easy as it sounds.
There's also a psychological benefit or defecit, and that it permits one to hold a longer with less tension. The most I can lose is 4.25 but if I had a straight put I could lose alot more. Of course that could also be a hiderence, since the tendency would be to hold and if the market goes in the wrong direction, it will be a loss.
As for my total strategy - this PUT spread was only a small position, and I basicly made the decision to risk 4.25 to make 10.75 with relative safety compared to a straight PUT.
A PUT spread is not for everyone either. Alot of research.
seeya |
