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Consider this scenario: Say the S&P 500 closed at 3400 today (Sep-9) and you knew (100%) for a fact that by the end of trading day tomorrow (Sep-10) 4pm it will close at 3200.

So now, given this fact, what do you think would be the action to make the absolute most amount of money using all your capital at hand? Would it be (use ALL your capital on below choices):

  1. Buying 3200 PUT options expiring on Sep-11 (Weekly ending) [closest expiry]
  2. Buying 3150 PUT options expiring on Sep-11 (since it still has 1 day to go for time-value and due to the massive crash, it may get bit up high)
  3. Or would you go far out of the money getting say 3000 PUTS with further expiry of Sep-30?
  4. Or a 3400 PUT expiring on Sep 11, so you get a full 200 point intrinsic value
  5. Buying Sep-18 Short Futures e-mini Contract.
  6. Buying Dec-18 Short Futures e-mini Contract.

In a nutshell, if all things being equal inch for inch and pound for pound, would Futures contracts make most money or extreme out of the money PUT options which are about to expire but suddenly go in the money. I would assume Options do. What do you think?

P.S. OR relating to my other question, credit default swaps? But I think those are for longer term crashes and require debts to be defaulted and hence not suitable for this scenario?

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Assuming that the market's estimate of volatility, interest rates, and it's expectation of the future value of the index remains the same, the answer is probably 5, and then 6.

Buying any option will cost you a non-zero premium, and the delta will always be less that than of the future. Plus, you are also getting one day closer to the expiry which erodes the option value.

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  • Makes perfect sense @ThatDataGuy, thanks. But note registered accounts are not allowed to have margin and hence cannot trade Futures. Only cash and margin accounts (non-registered are allowed that), which completely stinks. But wouldn't 6 makes less money, since it's further away? if they make exact same, then why would anyone get Sep instead of Dec?
    – Steve237
    Nov 27 '20 at 3:07
  • I got confused between daily and final settlement. I have corrected my answer. Thx Nov 27 '20 at 9:17
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I'll just address the option component of this.

There are software programs such as Optionvue which can tell you how a position (or multiple positions) will perform at any price, at any implied volatility, on any day prior to expiration.

There is a fairly easy alternate answer to this but it can't be provided based on the information provided. This could be roughly calculated in Excel with some fixed assumptions:

  • Cut and paste the strikes and put prices into the spreadsheet

  • Determine how many of each put you could buy with your starting capital

  • Assume that all strikes above 3200 go to parity and will be worth their intrinsic value

  • Calculate the gain (strike - 3200) x number of puts

Anything involving value prior to expiration (time premium) and variation of IV would require an imbedded Black Scholes calculation and that's a far more complex spreadsheet.

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  • Yes thanks. It was more of a general question, as opposed to getting in the nitty gritty details of Black-Scholes models etc. I suppose it can be calculated for past values, looking at option histories. I did this around a year ago, and if I recall correctly I came to the conclusion that in general a little out of the money with a few days to expiration maximized profits. But I also like the Futures crown to comment on it. I am more interested also to see how a Futures short would do comparatively.
    – Steve237
    Sep 13 '20 at 4:00

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