No. of Recommendations: 5
A little over a year later, with the stock 56% lower than when I bought the puts, the puts are worth $2.47. The implied volatility must have been through the roof when I bought -- I don't think time value decay fully explains it.
More likely the problem is that your strike was so low that even a 56% fall leaves the stock price miles above your strike. $30 is pretty low compared to today's price of $184, so it likely that option would pay out only in the even of something resembling bankruptcy. (not to be ruled out! but might take time...)
Higher strike puts are expensive, of course.
One strategy to help a bit, letting you get a slightly higher strike for your dollar at risk:
Say something is trading for $100 and you think it will hit a price below $50. Maybe below $35, maybe not. But a put at (say) $60 is too expensive for your level of conviction. So, you could buy a $60 put (preferably on an "up" day) and sell a $35 put (preferably on a "down" day) to partially offset some of the cost of the $60 one. You give up the profit of any potential drop below $35, but it was the drop to $50 you were most sure about, so that's OK.
Writing the $35 put is zero risk, PROVIDED you don't close the $60 one first. If the low strike one starts losing you money, with each dollar of price fall you'll be making as much or more on the $60 one the whole time.
For the real dweebs, have a gander at a "short iron condor" payoff diagram, and imagine it entirely below the current stock price. (gander, condor, birds, get it?) You make a predictable amount if the stock price settles into the range you choose, and lose a bounded amount known in advance if it doesn't.
Jim
