Wanna bet on a financial crash in 2015?
Buy cheap put options on JPMorgan Chase and Bank of America stock.
Disclaimer: If you do this, it is a bet, a gamble, a guess, a bit of speculation. Don't do this if you are in debt. Only gamble with money you can afford to lose.
No one can predict the timing of financial crashes. It might happen while I'm writing this post, it might happen tomorrow morning...but it might not happen in 2015 at all. It might happen in 2016, or it might not.
But if you see the world the way Dr. Strangemarket does, you agree that the problems that caused the 2008 financial crash have not been solved, and sooner or later there will be another crash.
So if you make a bet on a financial crash, you want to risk a little for the chance to gain a lot. You need to get very good odds for your bet, to maximize your payoff. That way, you can keep making the bet every year, and when it pays off, it will more than make up for the bets you lost, many times over.
That's why Dr. Strangemarket likes cheap put options on JPMorgan Chase and Bank of America stock.
Why JPMorgan Chase? Because it's the biggest bank in the United States. Because it's heavily invested in the kinds of derivatives and other financial products that will be most at risk in the event of a financial crisis and crash.
Because in the 2008-2009 crash, even though it was not hit as hard as Lehman Brothers or AIG, JPMorgan Chase stock still plummeted from $48.24/share on September 26, 2008 to $22.72/share on November 21, 2008 and all the way down to $15.93/share on March 6, 2009. That's an over 50% drop in two months and an over 66% drop in six months.
If that happens again, JPMorgan Chase stock could fall from its current price around $65/share down to $32.50/share or as low as $21.66/share. If JPMorgan Chase is the central focus of the next financial crisis (the new AIG), its stock could get hit even harder than that.
And today, you can buy a $40/share put option on JPMorgan Chase stock (JPM), good till January 15, 2016, for a premium of just $0.30 or less per share, or $30 or less per contract (100 shares). That means, for every dollar per share that the stock falls below $40 before next January, you make $100 when you sell your option. If the stock falls 50% to $32.50, your $40 put option is worth $750. That would be a payoff of 25 times the premium you paid or more.
And Bank of America put options may offer even bigger payoffs.
Bank of America was one of the worst hit banks in the 2008 crisis and crash, but once again it is one of the biggest players in the derivatives trading market. If its stock loses half its value in a crash this year, it could drop from over $16/share down to $8/share, and a 66% drop would take it down to $5.50/share.
But today you can buy a $10/share put option on Bank of America (BAC) stock, good till January 15, 2016, for a premium of only 5 cents a share, or $5 per contract of 100 shares! Now it's true at such a price you have to account more for the per-contract fee your broker will charge, in addition to the standard fee for the whole trade. But even with, say, a 65 cent per-contract fee making your cost $5.65 per contract, your payoffs in the event of a crash will still be sky-high: with the stock at $8/share your payoff will be 35 times the premium you paid, and with the stock at $5.50/share your payoff will be 80 times the premium you paid!
With payoffs like these, you can make these bets every year, and eventually you will make a gain much greater than all the premiums you paid put together.
Disclosure: Dr. Strangemarket has bought some of these JPM and BAC put options, and if you're the gambling type, you might want to grab some yourself.
We're not alone. Almost 15,000 contracts ("open interest") of the JPM January 2016 $40 put option have been bought, controlling almost 1.5 million shares of the stock with a market value of almost $100 million, and almost 59,000 contracts of the BAC January 2016 $10 put option have been bought, controlling almost 6 million shares of stock worth another $100 million. A few big-time traders could actually make a billion dollars off options like these if they pay off as described above. We can't make out that well, but at least we can get a piece of the action.
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