On Sunday, DIY Investor introduced readers to LEAP options, longer term option contracts that give the owner the right to buy (calls) or sell (puts) shares at a specified price (the strike price) over a given period of time (time to expiraton).
The post was motivated by the negative news and the potential for a Black Swan event. In recent days, the price of oil has skyrocketed and the markets have been pounded. This after a prolonged up period for markets which produced nice gains.
Events have presented DIY Investor with an excellent teaching moment.
Let's revisit the SPY (S&P 500 indexed ETF) Decmber 2013 100 put. To review, this put allows the holder to sell SPY at $100 anytime between now and December 2013. It was priced as reported in the post at $7.26. Last night it closed at $8.64, a gain of 19%! To find the price, retrace the steps described in the last post.
You can see two things from this: these derivatives (yes...they are derivatives) can be used to gamble. Many people use options to outright gamble - take highly leveraged positions with a relatively small amount of money to bet stocks will move one way or the other in a given period of time. This is, IMHO, not something hopefully DIY Investor's readers would consider.
The other point is that LEAP options can provide a type of insurance to lock in gains against a "Black Swan" type of event.
In any event, these are instruments that some (they are definitely not for everyone) DIY Investors should have in their tool kit. Following them on paper is free and interesting in volatile markets. Be my guest.
This post is not a recommendation. It is for educational purposes only.
This is definitely interesting. I'm not into options but am learning about them anyway because things have been so volatile. Right now, they are definitely outside of my comfort level.
ReplyDelete@Shawn In my view they are worth considering solely as a form of portfolio protection. For a small amount they can reduce losses in the event of a large, sharp downturn.
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