NEW YORK ( TheStreet) -- Cost matters in just about everything, especially when making investment decisions.
Up until last week, I was advocating buying September and December puts and writing some covered calls to help hedge portfolio downside risk.
Well, those puts have gotten very expensive, and writing covered calls generates next to no premium. So, why not turn the trade upside down and sell puts, a strategy that is typically associated with being bullish?
On Monday, after another volatile day in the market, the State Street S&P 500 ETF (SPY) closed just above $156. The December 145 puts on SPY are trading at $5 per contract, about 3% of the value of the ETF -- making it very expensive, or a great deal for the seller.
If the markets decline by more than 7% and I'm "put" the ETF, I still benefit from the 3% premium I collected and own SPY 10% lower than anyone who bought today.
The market stabilizes and trades in a tighter range. I get to keep the 3% premium and am slightly ahead.
The market rallies. Same outcome as #2.
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