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Napanee, Ontario | "I still haven't been able to see how puts can help in a rising market."
You have to roll them up to increase your floor. It costs money to do this, so what people will do if they are expecting a rising market is to buy the near term months so the premium is less and the roll up is cheaper.
When you buy the near months you will have to roll farward to keep your protection active, so the ideal 'plan' (hope) is the buyer rolls UP when he rolls forward. If the market stays flat however, you will invariably spend more than if you had of just bought the farther out month at the same strike in the first place.
It's a trade off - if the market continues rising, Rolling up is cheaper using the front months. But if the market stays flat, you spend more rolling forward than just buying farther out.
You can see it just picking a strike and looking across the expiries.
Lets use 210:
The Aug 210 put is 1.80.
The Nov 210 put is 4.0.
The AUG expriy is 6 weeks away and there is still 1.80 of premium left. Nov exp is 21 weeks away yet the premium is only double (roughly) the near month.
If the market stays flat, and the Implied volatily stays flat, and you just roll the 210 forwared at the same strike on the near month each time, you would spend a lot more on your protection than if you had of just bought the nov 210 in the first place.
But the idea is that if the market continues to rise, you stand to lose a lot less money on rolling your pts up to higher strikes (raising your floor) when you have a lot less into the premium each time on the near months. If feeders go to 250, and the buyer wants to raise his floor, the nov 210 strike and the aug 210 strike will both trade for pennies, but the Aug buyer has a lot less premium to lose when he rolls up.
Hope that helps.
Edited by OldMcdonald 7/7/2014 08:18
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Garvo's Bean floor
