- quote -

I still haven't sold my current home so I could not do this yet even if
I wanted to. Even if I did though, remember that my plan was to buy
index equities and buy long term put contracts. My downside is limited
to the option premiums. There is no way on earth I am going to put my
home equity in play.

- quote -

One of the interesting things about catching up on newsgroup traffic
that's weeks or months old is that you have the advantage of 20/20
hindsight.

In the five weeks since this thread started, the Wilshire 5000 has lost
3.81 percent.

Now maybe there's going to be a big rally over the next 11 months. But I
don't think *I'd* have the guts to make that bet with money I need to put
a roof over my head.

Sure hope the original poster didn't go through with his option scheme. If
he did, he's going to be renting in his new city for quite a long time.

<<I stated that I wanted to "invest while preserving capital" and
proposed an investing plan that capped my potential loss at the
premiums paid on put contracts.>
Yes, I understood that. But suppose you buy 100 shares at $20 ea. for
$2000, and the stock goes up to $25. Your $20 put expires worthless.
You have $500 profit on the shares. On the other hand, if the stock
goes down, you exercise the option and just break even. Your maximum
profit is the increase in the stock price * 100.

On the other hand, you could establish a Bull Call Spread
(http://www.callsandputs.com/desc_BullCall.asp) position for say 500
shares at a net cost of $4 ea. (you would not have to actually buy the
stock). If the stock goes up, your maximum profit is the difference
between the strike prices - net debit * 500.

Buying 100 shares would only give you a bigger profit than than a Bull
Call Spread on 500 shares if the stock price goes *way* up. The
downside risk (premiums paid) is about the same for both. Plus, with
the Bull Call Spread, you would not have to pay commission on buying
and selling the stock.

John Cowart

Did you actually read my original post. I stated that I wanted to
"invest while preserving capital" and proposed an investing plan that
capped my potential loss at the premiums paid on put contracts. I
don't know that I could have been much more clear that limiting my
downside was important.

<<Actually you missed a big downside: there is no market decline
protection>
Well, you didn't mention that in your original post. If that is a
consideration, then you need to investigate "spreads and stradles" - a
buy/sell combination of both a put and a call on the same stock. One
version makes money if the underlying stock moves in either direction,
the othe version makes money if the stock stays the same. I can never
remember which is which...

John Cowart

Actually you missed a big downside: there is no market decline
protection, which was the whole point of the puts. Although I think
the market will keep going up I have to be certain I don't lose money.

<<I will then buy long term Put contracts ... If the market continues
to appreciate, as I think it will>
You could alternately sell some slightly out of the money Call
contracts. If the underlying stocks go up enough, the purchasers would
exercise the options, and you would sell the underlying stocks at the
slightly higher price. No matter what happens, you keep the money you
were paid for the calls.

The only downside - even if the underlying stocks soar to a gazillion
dollars per share, you only get the strike price for them when you
sell.

John Cowart

On Tue, 16 May 2006 13:52:30 -0500, es330td[at]gmail.com <es330td[at]gmail.com> wrote:
- quote -

Options have negative theta, which means that they tend to lose value
as time passes.

This is not a bad idea or a good idea, as such, in isolation from your
risk preferences. Maybe you hate losing so much that you would pay a
hefty sum to insure yourself from the possibility of losing, then
buying puts is not irrational.

But there is a definite cost to buying at the money puts, if the
market does not move down, you would lose the entire value of the put.

i

es330td[at]gmail.com wrote:

- quote -

Uh, it's a horrible idea.
The SPY is at 129.63 right now, so let's look at the $130 put, MAR 07.
It's ask, $7.80 or 6% for the ten months. The S&P will need to rise that
much for you to break even, as you actually hope the put becomes
worthless. As one year rates are over 5% now, you'd need the s&P to rise
over 11% for you to break even to the alternative of just buying the CD
or T-bill.
You made it clear this is "one year money". You should treat it as such.
T-bill, my friend.

(If you insist on this, the other way to do what you want is this; Buy a
T-bill with 95% of the money, so you get your money back in one year.
Then take the balance and buy calls, maybe the 140 at $3, so if the
market goes on a tear, you will participate in all the gain beyond 140.
But I still say don't do it.)

JOE

Due to an upcoming move, I am about to sell my primary home and realize
a healthy profit. In my new location I am going to rent/lease for the
first year and save the money for a down payment a year later once I am
sure I want to stay.

I could just put the money into a CD and sit on it for a year but I am
a big advocate of the stock market, especially given the way it is
performing right now. As a result I am thinking of a different way to
invest while preserving capital. I will put as much of the profit as
will buy 100 share round lots of an index stock like DIA, SPY or QQQQ.
I will then buy long term Put contracts that are at the money for
current market levels. If the market continues to appreciate, as I
think it will, then in a year I will have a decent amount more than I
have now. If it falls I exercise my option and I am out the premiums
on the options and no more.

Does this seem like a bad idea? Are there better ways to do this?

TIA