4 ms·

Buy 1 Dec 16, 2022 SPX $3,625 Put Sell 1 Dec 16, 2022 SPX $3,600 Put Midpoint price is $3.60 for $25 max gain if SPX is under $3,600, which implies something

Buy 1 Dec 16, 2022 SPX $3,625 Put Sell 1 Dec 16, 2022 SPX $3,600 Put Midpoint price is $3.60 for $25 max gain if SPX is under $3,600, which implies something like a 14.4% chance that SPX is down by 20% more on Dec 16, 2022.

pgwhalen 5y ago
Perhaps not the best answer to facilitate discussion, but certainly the most "accurate" one if you want a sense of what the crowd thinks about the chance of a crash.
ShivShankaran 5y ago
theta will eat away any profit for such long dated options
- benmanns 5y ago
  That doesn't change what the quoted pricing predicts. Theta means it's not free to make the bet. Also, with spreads like this, usually your short theta mostly cancels out your long theta, so it's not as expensive as you might think.
id 5y ago
Even if that happened, it would only erase the gains of 2 years.
ryanjkirk 5y ago
I'd be incredibly grateful if someone could break this down for me.
- lucozade 5y ago
  They're suggesting you enter 2 financial derivatives contracts. Specifically options on the level of the S&P 500 index as it will be in Dec 22. The first transaction is to buy a, so-called, put option struck at $3625. This means that if the level of the S&P is below the strike price ($3625) on the 16th Dec, you will make the difference between the level then and the strike price. Buying this contract will cost you some money, called the premium. They're also suggesting selling a similar contract struck at a lower price ($3600). It will have a similar payoff to the first one but for the buyer of the contract. For you, you'll lose the difference between the S&P level and the strike price if the S&P level is below $3600 in Dec. You will receive a premium from the buyer for this trade. The premium will be a little less than the cost of the option you bought because the strike price is further from the current market level. The reason for the 2 together is that, for most future levels of the S&P, gains and losses will largely net out. You'll lose a bit of money (the differences between the premia) if the level doesn't go below $3625. But you'll gain a bit more if it does ($25 - the diff between the premia if I recall correctly). The current level is about $4470, so the premia for both should be quite low as the strike price is a long way from the current level. We call that an out-of-the-money option. As such, the differences between the premia will also be very small. In summary, they're suggesting a pretty cheap way to make money if the S&P tanks by Xmas. And you would lose (relatively) little if it didn't tank. Do not consider this to be investment advice. I reserve the right to have completely forgotten options 101 which I did 20 odd years ago.
  - pesfandiar 5y ago
    I don't think they're suggesting to actually make those trades, but trying to show what the market thinks the probability of a sizeable crash is.
    - benmanns 5y ago
      That’s correct. It’s pretty infrequent that I assume I know better than the market is pricing.

pgwhalen 5y ago

Perhaps not the best answer to facilitate discussion, but certainly the most "accurate" one if you want a sense of what the crowd thinks about the chance of a crash.

ShivShankaran 5y ago

theta will eat away any profit for such long dated options

benmanns 5y ago
That doesn't change what the quoted pricing predicts. Theta means it's not free to make the bet. Also, with spreads like this, usually your short theta mostly cancels out your long theta, so it's not as expensive as you might think.

id 5y ago

Even if that happened, it would only erase the gains of 2 years.

ryanjkirk 5y ago

I'd be incredibly grateful if someone could break this down for me.

lucozade 5y ago
They're suggesting you enter 2 financial derivatives contracts. Specifically options on the level of the S&P 500 index as it will be in Dec 22. The first transaction is to buy a, so-called, put option struck at $3625. This means that if the level of the S&P is below the strike price ($3625) on the 16th Dec, you will make the difference between the level then and the strike price. Buying this contract will cost you some money, called the premium. They're also suggesting selling a similar contract struck at a lower price ($3600). It will have a similar payoff to the first one but for the buyer of the contract. For you, you'll lose the difference between the S&P level and the strike price if the S&P level is below $3600 in Dec. You will receive a premium from the buyer for this trade. The premium will be a little less than the cost of the option you bought because the strike price is further from the current market level. The reason for the 2 together is that, for most future levels of the S&P, gains and losses will largely net out. You'll lose a bit of money (the differences between the premia) if the level doesn't go below $3625. But you'll gain a bit more if it does ($25 - the diff between the premia if I recall correctly). The current level is about $4470, so the premia for both should be quite low as the strike price is a long way from the current level. We call that an out-of-the-money option. As such, the differences between the premia will also be very small. In summary, they're suggesting a pretty cheap way to make money if the S&P tanks by Xmas. And you would lose (relatively) little if it didn't tank. Do not consider this to be investment advice. I reserve the right to have completely forgotten options 101 which I did 20 odd years ago.
- pesfandiar 5y ago
  I don't think they're suggesting to actually make those trades, but trying to show what the market thinks the probability of a sizeable crash is.
  - benmanns 5y ago
    That’s correct. It’s pretty infrequent that I assume I know better than the market is pricing.