Hello guys, I'm relatively new at this, so I'm here for your wisdom. If I'm expecting a stock to decline significantly in price ~70%, what would be the best strategy for maximizing profits? Buy puts, yes, bue which ones ? Thank you!
Posted by DariusYop
8 Comments
There’s not enough information here to give you an answer. If implied volatility is high, you could be right and still lose money. We’re going to need the ticker, expiration, and strike prices if you want anything more specific.
Your going to lose money if you play options and don’t have an understanding of how they work as an investment vehicle. Just buy stocks.
I’ll try to actually answer. I’m guessing the IV is super high so the best bet would be a bear put spread. Long put half way from its price and the target price. The short put a little past the target. Give yourself a longer timeframe than you think you need.
If you can only buy long puts, or if IV isn’t too high, the best RR will be about a little closer than half way in between the price and target. So about 25-30% OTM from the current price. Beware, if the stock only goes down 30%, you lose it all, but it gives you the best RR assuming you are exactly right
If you don’t think you’ll be exactly right and want to profit on any kind of drop, just take an ATM put.
buy puts when you have a timeframe. If -70% is your target, find the highest strike price that trades at 0.05 after that timeframe, then buy the shit out of it and hope your expectations are correct. you can finance this by going short calls too, if your broker will let you.
I’ve found a good generic rule of thumb is halfway between where it is now, and where it will end up.
If you know exactly where it will land and when you can achieve maximum leverage with a short ironfly.
You can calculate this in a spreadsheet or an option modeling program by inputting the strike and premium, and looking at the gain per option at your target price. Note that if your target price is wrong, the result may be different than your modeling.
So i get calls for the most part but puts still confuse me. So say I buy 2 puts for CRM at $230 and it keeps dropping (good) how will I take profit from it? Will I be on the hook for 200 shares? How does it work for puts?