No. of Recommendations: 9
Thanks for the idea. Do you have small cap funds you prefer for "disaster puts"?
I didn't really overthink it, just picked something plausible, IWM tracking the Russell 2000. It's liquid.
Homilies about disaster puts:
They aren't usually a good investment. Not only do you have to be right about a market drop, you have to be right about when it will happen. Expect to have a total loss. It's like buying fire insurance for your house.
Decide in advance what situation will cause you to close them. Nothing worse than seeing your puts soar in value, then being hesitant to sell them and watching all that value evaporate again as the market rebounds. Rebounds after big sell-offs tend to be strong and rapid. One dumb strategy: buy puts in pairs. As soon as any contract has doubled in value, close half. That way at least you'll break even if you let the second half expire worthless!
If you want to get a bit fancy, the puts are very expensive at the moment. You can cut the cost a bit if you realize that you're unlikely to benefit from a HUGE loss...there is probably a target range of market lows that you think seems plausible. Say, you want to profit from drops between -20% and -40%. (those are for illustration, not predictions) In that case, buy a put 20% below the current level and sell a put 40% below, to offset the cost. Writing an index put seems risky, but it isn't if done in a pair trade like this PROVIDED you remember never to close the higher strike one first. If the market goes to -80% the put you've written at -40% will lose you a fortune, but the one you bought at -20% will be making a fortune cancelling that out.
Jim
