Quote:
Originally Posted by Ken07AOVette
I am sorry- I read this every way but upside down, and I can not figure that out
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H'okay.
SDS is a double inverse index ETF. For every move the s&p makes downward, the sds goes up double that amount. So it's good to have at the start of a crash.
A bear put is a kind of financial 'spread' built with put options. With it, you speculate that some underlying stock (or ETF in this case) is going to drop, particularly from the crest of a big runup. But you are limited to how much you can lose or how much you can make. You cannot get killed with it. You have to have good reason to believe the underlying will drop however (or in this case would be at the point that the s&p has crashed as far as it will). When the s&p starts chugging back up again, the SDS slides down the mountainside. That's when you want to have a bear put spread.
If you are right because you figured out when people are as scared as they are going to get, then you can make some profit to exactly a calculated amount. If you are wrong and the market keeps crashing further, you know exactly what your maximum hit will be.
It's better than buying (going long) the SPY index ETF, because you can potentially profit much more, dollar for dollar. And if you are wrong after buying that SPY you'll never know if/when it will just keep on crashing and what you will do when you see you money going bye-bye. Any loss with a bear put spread will be capped and known exactly, well in advance, so you won't panic if your educated guess is wrong. But of course you have to get the direction correct at least, which is not too hard to do after a big, long crash when the dust is settling.
To get into the position up front (using put options) you have to pay into it. At expiry of the position, you get paid out all that and usually much more. But the brokers being what they are, they want to see you having enough cash in an account to cover that limited, known, calculated maximum loss. That's what hanging onto the US bucks is for, so you can take a position when the dust is settling and it looks like everybody was really dumb for selling so low in a panic.