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Is it time to hedge against a possible correction & how?
The thesis :
It’s hard to short or hedge against this market & the FED printing machine. Although the bull market may continue especially in the tech sector, it’s wise to hedge against a correction which is highly probable in the next 2-3 months. Our model indicates a probability higher than 69% to see a correction to levels below 3150 for the SP500 in the next 3 months.
The trade :
Buy the 16 Oct2020 SPY put with strike price 325 at 6.53
Sell the 16 Oct2020 SPY put with strike price 310 at 4.10
for a net debit of 2.43 or 243 USD per options contract.
The Scenarios on Oct the16th:
Maximum loss per contract is the debit of 243 USD plus the commisions of course. If closes above 322 there is a loss linearly increasing from 0 up to 243 USD. Maximum net profit per contract is 1259 USD if the SPY closes below 310. If closes below 322 there is a profit linearly increasing from 0 up to 1259 USD.
The position has a positive Vega (profits with increasing volatility) & a negative Theta (loses with time).
The warning :
Options positions must be managed dynamically and usually must be closed enough time before expiration .