On March 6th, I sent this note to many of our loyal readers in an e-mail:
"Thanks to all of this market destruction, there are some extreme examples of market volatility that could provide what I call, easy money.... You can write puts for December 09 on the S&P at 400 and pocket a $150 premium. Using a bull put spread option, you can buy puts for December 09 on the S&P at 350 for $75. You collect a net premium of $75 and your required collateral to hold is $500 (the difference of 400 on the S&P and 350), making your total return 15% and annualized 18%.... Even in my wildest bear dreams the S&P will not be below 400 this year, that would be another 40% decline from where we are today."
On March 6th, the S&P was at 683. Today, the S&P is at 756. If you executed this strategy, the puts you wrote would now be worth $75 each and the puts you bought would be worth $46 each. You take a $75 gain on the puts you wrote and a $29 loss on the puts you bought and that gives you a $46 profit per contract pair (spread) in just over one week. $46 on $500 collateral is 9.2% return, but annualized its 478%.
We all need dry powder in our accounts for opportunities like this!
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To be fair though, The S&P was up almost 10% last week and the spread return was 9.2% last week.. Its hard to annualize one time events such as this.
ReplyDeleteStill there was less risk with the spread than with just buying the market.
Looks like another huge gap up from the market this morning. I wonder when the pullback will finally come, I thought it would have already pulled back by now....
You hit it right on the head. The chances of trading below 400 this year are highly unlikely, whereas the chance that the market would rally 10% is near 100%. But you're right, the annualization is not really fair -- but I'll take 9.2% in one week, no matter what.
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