The strongest decline protection PP (December) of "option actual combat strategy with monthly income of 10,000 US dollars"

In an interview with CNBC on December 27th, Tom Lee, the new stock god, said that he was optimistic about the double-digit growth of US stocks in 2022, but he also stressed that a correction of more than 10% was very likely in the first half of 2022. His view shows at least one thing: Under the expectation of three interest rate hikes, the road of US stocks in 2022 will be bumpy. Faced with such a turbulent market, what tricks do we option players have to deal with?

In the previous article "Be a buyer or a seller?"I once made a metaphor saying that the seller of options is like selling insurance: if the thunder does not cut down, we will accept the insurance premium; If the lightning strikes, the seller will pay the buyer the loss. You can also think of options as an insurance service provided by the seller to the buyer, and that premium is the service fee paid by the buyer. I don't know if you have thought about it in reverse. Do we also need to buy insurance?

Zhuge Liang said: If you want to think about its benefits, you must consider its harms; If you want to think about its success, you must worry about its failure. It means that if you want to seek benefits from something, first think about whether it will bring harm; If you want to plan something to succeed, you must consider whether it will fail and what will happen if it fails. This is Zhu Gekongming's way of leading the country, but it is also the way of investment. Before entering the market, retail investors of new leeks generally only think about how to earn money, but don't think about how to lose money, or don't bother to think about it.

In fact, losing less money is another way to make money. It is very important that losing less money can make us stay at the table for a longer time. Investment is long-term. How much you earn depends on the chips you can take away when you really leave the table. Therefore, the success of investment depends not only on how much you earn in the bull market, but also on whether you can keep the principal in the bear market. "If you stay in the green hills, you are not afraid of no firewood." As long as we keep the principal, we can keep the opportunity and hope of turning over.

In the past, we talked about how to make money, but in this issue, we talked about an option strategy that can make us lose less: Protective Put.

According to international practice, first look at the income of my option strategy this month:

It made a profit of $31, 000 in December

In 2021, the average monthly profit from falling bags was 28,000 yuan, with Sharp ratio of 1.61 and leverage ratio of 1.82.

This is a month of ups and downs, and it fell sharply at the beginning of the month. I closed a lot of SP in advance to reduce the risk, and the profit decreased, but I passed the dangerous period smoothly. By the time the market started in the New Year, the SP position on my hand was already a healthy profit state.

A total of 20 options transactions were completed in December, which are recorded as follows

As of December 30th, my$Tesla Motors(TSLA)$ Position

As of December 30th, my$Coinbase Global, Inc.(COIN)$ Position

< img src= "https://static.tigerbbs.Com/c8e2ea2ef57bea8c029e75793cf2065e "tg-width=" 496 "tg-height=" 320 ">

As of December 30th, my$Meta Platforms, Inc.(FB)$ Position

Advantages of PP: Strongest fall protection

Protective Put (PP) refers to buying a put option whose exercise price is lower than the current stock price while holding 100 positive shares.

When the stock price falls above the exercise price, the buyer of Put can sell 100 positive shares at the exercise price, thus reducing the loss. For example, Tesla's current stock price is 1100, and I have 100 positive shares. I think the stock price will fall in two months, so I bought a Put with an exercise price of 1000. Two months later, Tesla was hit by negative news and interest rate hike policy, and its stock price plummeted to 850. At this time, I can sell 100 regular shares at the price of 950. Originally, my loss was (1100-850) x 100 = 25,000, but because of the protection of Put, my loss was reduced to (1100-1000) x 100 = 10,000, which is equivalent to earning 15,000.

Holding stocks is bullish. You earn as much as stocks rise. Similarly, you lose as much as stocks fall. Buying Put is a bearish stock. When the stock falls, you can make money through this Put. The combination of the two is an option strategy of decline protection: when the stock price falls, your losses will decrease, and when the stock price falls below the exercise price of Put, the losses will not increase again.

Profit and loss curve of PP

From the above profit and loss graph, compared with PP's simple holding of positive shares, it completely seals the scope of losses below, that is, it completely seals the risk that the stock price falls below the exercise price. This is the power of PP, which is the most protective option strategy.

Disadvantages of PP: High cost

Of course, there are always gains and losses in the world of options. It is too beautiful to want to have your cake and eat it too much. The price that PP can provide the strongest protection is its high cost. Take the Nasdaq ETF (QQQ) as an example: the current ETF stock price is 401, and the ATM Put price due one month later is 8.15, which means that no matter how much it falls after buying this ATM Put, you will not be afraid.

Let's calculate how much it costs if this Put is bought for one year. The cost should be 8.15 x 12 = 97.8, accounting for 97.8 (royalty)/401 (positive share value) = 24.3%! We should know that in the whole year of 2021, the growth of QQQ was only 23%, and the protection cost of 24.3% ate up the profit of this year.

From this, we can also draw a conclusion: PP can't be done frequently, and this strategy can only be used occasionally in special market environment.

How much protection depends on how much you are willing to spend

The cost is too high, so what if we buy an OTM Put? Or the above example, if you lower the exercise price, what about buying an exercise price of 380, 360, or 340? Let's look at the table below.

For PP strategy, the most important part is to choose the exercise price. So how do we choose the exercise price? Choosing the exercise price means choosing the maximum loss you are willing to bear and the price you are willing to pay. As shown above, if you are unwilling to bear any retracement, the price you need to pay is 22% annualized return, and if you are willing to bear 5% retracement, your price will be 10% annualized return; If you are willing to bear a 10% retracement, the price is an annualized return of 5%. And so on.

There is no right or wrong choice of exercise price, which is only related to everyone's judgment and risk tolerance, but this choice should be before opening positionsCalculate clearly.

Difference between PP and CC

Option, a financial derivative, was invented to hedge risks. Protective Put (PP) and Covered Call (CC) are both protective option strategies, which allow us to protect profits when the stock price goes down. The most essential difference between PP and CC is to express investors' different views on the general direction of the market outlook: if you think that the market outlook is likely to fall and the range will be deep, you can use PP to protect your position from the decline; If you think that the market outlook is sideways or slightly down, but not soaring, you can use CC's strategy to earn extra income.

Optimal solution to reduce PP cost-plan ahead

The best way to reduce the cost of PP is to open PP when the stock price is at a high level. At this time, IV (implied volatility) will not be too high, and the cost will be reduced. This is the so-called "greed when others are afraid, and fear when others are greedy".

But guessing the top is an almost impossible task. "When others are afraid, they are greedy, and when others are greedy, they are afraid", which sounds easy, but for the old leeks who have experienced bulls and bears, they know that it is the stock gods who can do this. Normal people are afraid when others are afraid. This is the result of human evolution: Hundreds of thousands of years ago, When a saber-toothed tiger came after him, Everyone will be very scared, And spread this fear to the companions who haven't seen the lion yet, so a group of people fled in all directions, and those who won't be afraid of emotional contagion were taken away by saber-toothed tigers, so all the genes left behind will be afraid of emotional contagion. As descendants, we have such genes flowing in our blood.

When the market falls sharply, IV will become very high. At this time, everyone is rushing to buy Put protection. Inevitably, the price of Put will become very high, and it will cost more to protect it.

But Timing the Market is a difficult or near impossible task, so are there any other ways to reduce the cost of PP?

Buy Put and then sell a Put with a lower exercise price

Taking the above QQQ as an example, the protection of PP ranges from exercise price to zero, but in fact, the stock price of QQQ cannot fall to zero. From the following figure, the lowest point in 2021 is 352, so we can think that QQQ will not fall more than 360 during the period of protection.

So we can sell a Put with an exercise price of 360 and get a premium of 1.47, so the cost of our hedge protection option portfolio is reduced from 7.48 to 7.48-1.47 = 6.01, and the cost is reduced by nearly 20%.

Of course, if the stock price falls below 360, this strategy will have no protection for the positive stocks at all. Option strategies are trade-offs, and there are gains and losses, which is the basic concept that we should have when operating options.

Buy Put and then sell a Covered Call

The above approach is to reduce the cost at the expense of lower stock price protection. The advantage is to keep the profit space in case the stock price rises. Following this line of thinking, if you have no hope for the upward trend of the stock price, you can sell a Covered Call (CC) at the expense of the profit space of the stock price rise, thus achieving the purpose of reducing the PP cost as well.

You see, the combination of options is such a trade-off relationship, and there are gains and losses.

Know your opponent's thoughts

Options are a zero-sum game. The options you sell must be bought by a buyer. What you earn is what TA loses, and vice versa. That is to say, you have an opponent every time you trade options. For those option sellers, PP strategy may not be on your plate, or you may not have many opportunities to use it, but understanding the connotation of this strategy is very helpful for you to operate Sell Put strategy, because this is the thinking mode of your opponent.

Only by knowing ourselves and ourselves can we fight every battle.

Previous series of articles (4 million + readings)

On the Cultivation of Option Sellers in the Practical Strategy of Option with a Monthly Income of 10,000 US Dollars (November)
Advanced Options: "$10,000-a-month option strategy" adds a leg to Sell Put (October)
Advanced Options:< a href= " "target=" _ blank "> [Option Actual Combat Strategy with a Monthly Income of 10,000 US Dollars] What about the option strategy of making a steady profit without losing money? (September)
Introduction to Options: [Special Article of Option Series] Apple's new products will be released soon. What about options?
Introduction to Options: [Actual Combat Strategy of Option with Monthly Income of 10,000 US Dollars] What is the Terrier of Option? (July)
Option strategy diagram: "The Practical Strategy of Option with a Monthly Income of 10,000 US Dollars" Illustrates the Faith School's Play (June)
Crisis response: "Revelation of Collapse" Special Chapter on Crisis Response of Naked Put Option Strategy

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The purpose of our investment is to make our lives better and spend more time with our families or doing things we like, not the other way around.

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Modify on 2022-01-04 09:55

Disclaimer: The above content represents only the personal views of the poster and does not constitute investment advice on this platform.