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May 18th, 2010 at 1:02 pm
No worries David i found it. It was a Phil reco. He called it a disaster hedge on ETF DXD
Here it is.
That DXD play I mentioned is super-sweet as it is now:
Long Oct $23 calls at $5
Short Oct $27 call at $3.40 (net $1.60)
Short Oct $23 puts at $1.35 (net .25)
That’s .25 on the $4 spread and DXD is currently at $26.89. DXD is a 2x ultra so figure a 10% move on the Dow, to 11,500 is required to force a buy of the puts (and they can be rolled). If you put $500 into buying 20 of these contracts, the margin is about $5,500 and you collect $8,000 if the Dow is still this low or lower in October.
As we discussed in the $1M portfolio article comment section (a must read for Members), if you pair a trade like this with $40,000 worth of buy/writes that have a built-in $8,000 cushion (20%) then the market would have to fall 40% before you really start losing money on your new bullish entries. If the market goes up, even a little, against at the money buy/writes that pay 20%, then you will have $8,000 in profits and ONLY need to use some of that to deal with your putter IF the Dow is over 11,500. That’s how we manage hedged entries in an uncertain market!
I have a limited understand but it seems just straight buying an Oct call on DXD would give you a lot of upside if the market crashed, more than the spread and a limited loss on the call if the market continues up, I’m not sure why this spread is so good.