These are puts, you buy them, they have a fixed expiration date at which point they will be worthless if the price is above the strike price.
Fixed down side, upside is $100 per contract per dollar the stock is below the strike at expiry. You can also sell them before then, and price depends on time to expiry, volatility, and distance to the strike price. See Black-Scholes model for more info.
> If you're off, it could still crash and you could spend more money sustaining the position than you'd make.
And in Black Scholes this is called Theta Decay. In any form of short, there are maintenance costs, and maintenance costs roughly scale with the risk-free interest rate (usually assumed to be roughly the Federal Reserve's overnight lending rate)
Theta Decay is above-and-beyond the risk-free rate because you're also losing time-value. So you must always factor in the amount of time before a predicted crash: the longer it takes the more money you lose.
> So you must always factor in the amount of time before a predicted crash: the longer it takes the more money you lose.
I think the idea is, as a put buyer (market taker), this has already been baked into the option premium. The only "maintenance cost" in the sense of a cost that adds to an open position is from interest on margin loans.
There would be a maintenance cost from rolling the position into a later expiry, but I think the impression is that this is a precise single bet.
EDIT: You're spot on about opening a position being a sort of cost too, due to missing out on risk-free returns. This is especially important for hedging. Less so for a directional bet.
If you want to minimize loss of time value, you buy 2 year LEAPs, and then as their 1-year approaches, you sell the LEAPs and roll them back into 2-year LEAPs. Theta rapidly changes as you grow closer to expiration.
No one should be buying and holding just one option. Anyone who understands Black Scholes will be selling/buying and exchanging options as time goes on.
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Buying puts is a bull-bet on Volatility and bear-trade on the underlying stock, while losing Theta (largely based on expectation date. Longer means less Theta decay).
Selling calls is a bear bet on volatility, bear bet on underlying while gaining Theta in value each day.
And then there are the many combination trades that are available.
In any case, I don't think any sophisticated trader does the strategy you are assuming here. The sophisticated strategies involve selling and renewing your options as time moves forward / and or the stock price changes (to keep Delta withing appropriate levels).
Fixed down side, upside is $100 per contract per dollar the stock is below the strike at expiry. You can also sell them before then, and price depends on time to expiry, volatility, and distance to the strike price. See Black-Scholes model for more info.