Today I bought 6 contracts of QQQ Jan 06 $37 Put option (YMZMD) at $5.20/share plus a commission of $19.99. These options are set to expire on January 20, 2006.
I have to admit that this transaction is inspired by Whitney Tilson's column Bearish Option Strategies on Fool.com. Also, recently I came across lots of readings that convinced me that the market is greatly overvalued (here, here and here). Purchasing a long-term put option on Nasdaq seems to be a very logical move to insure or profit from the upcoming ugly correction.
The $37 put option is already in the money. Closing at $35.66 today, QQQ only needs to fall 10.8% in the next 22 months before I can break even. Some of the articles I read suggested that the overall market is overvalued by 40%, and Nasdaq is overvalued even more.
Adding the MSFT Jan 05 $25 Put option I purchased in January (which appreciated 42% so far), I feel I haved properly hedged my portfolio against potential market downturn. I am also poised to liquidate my profitable RJR positions later this month and continue to be defensive in the near future.