Welcome to quite possibly the dumbest bear trade ever made. It’ll make money… when the S&P500 drops below $50:
The most actively traded Dec 2011 S&P 500 put option – the right but not the obligation to sell the S&P 500 at a specific price by a specific time – is the $50 listed strike. As my friend pointed out, someone recently paid $0.25 to buy that $50 put option on the S&P 500. The most he can make on that uber-bearish option is $50 less the purchase price, or $49.75, for a 199:1 ratio — assuming, of course, the S&P 500 goes to zero by then.
It’s fine to bet on the S&P500 going to zero in theory… but get the right odds. 199:1? Try 199,000:1. Looks like he got slammed on the bid/ask spread as well. +150%. Ouch.
His only chance is that the S&P 500 falls, say to 600, and then he can convice someone else to buy this way out of the money option for more than $0.25. But then that guy will simply beat him for the dumbest trade. Please correct us, show what we missed, for both his sake and ours.
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