Another easy money strategy

[Profitaker]

Quote from skaranam:

On Friday AAPL closed at $76.30.

JAN 07 $75 CALL - $15.10
JAN 07 $75 PUT - $10.80

The break-even is $ 62.70, calculated thus;

$ 75 + (76.30-75.00)/2 = $ 75.65

$ 75.65 – ($ 15.10 + $ 10.80)/2 = $ 62.70
*******


To run a practical example;

At underlying $ 62.70 the loss on the long stock will be ($ 76.30 - $ 62.70)= $ 13.60

At underlying $ 62.70 the loss on the short straddle will be ($ 75.00 – (15.10+10.80)= $ 12.30

The combined loss at $ 62.70 will be (13.60+12.30) = $ 25.90

And the premium received was (15.10+10.80) = $ 25.90

$ 62.70 = break-even ?
*******

It's the same as buying 100 shares and selling 2 Calls to replicate a short straddle. You need to divide the premium received by 2 in order to arrive at the premium (and break-even points) per straddle.

 

[Don87109]

Quote from riskarb:

What is the b/e at expiration if selling two puts?

Strike-Putcredit=breakeven
75-10.8=64.2

So on the surface the original scenario looks like it has less risk, but if you add in the cost of carry both scenarios should be roughly equal (assuming no B/A slippage in the option pricing).

Don

 

[riskarb]

Quote from Don87109:

Strike-Putcredit=breakeven
75-10.8=64.2

So on the surface the original scenario looks like it has less risk, but if you add in the cost of carry both scenarios should be roughly equal (assuming no B/A slippage in the option pricing).

Don

The carry is already embedded in the pricing, which we won't know until Monday; if not, the call would simply trade at a premium of $1.30 over the put. I was implying that the pricing needs to be incorrect; either the put is too cheap, or the call to expensive.

 

[Profitaker]

Quote from riskarb:

I was implying that the pricing needs to be incorrect; either the put is too cheap, or the call to expensive.

Yep, else there'd be an arb. Agreed, and goodnight.

 

[riskarb]

Quote from Profitaker:

It's the same as buying 100 shares and selling 2 Calls to replicate a short straddle. You need to divide the premium received by 2 in order to arrive at the premium (and break-even points) per straddle.

I must be brain-locked, but I don't see why you're referring to > one straddle.

Regardless, there is too much carry implied in the call, or the put is quoted soft. I'll use realtime markets on Monday and compute the conversion[implied forward] and synthetic put.

 

[Profitaker]

Quote from riskarb:

I must be brain-locked, but I don't see why you're referring to > one straddle.

I'm not referring to > one straddle. I'm referring to how a synthetic equivalent is priced;

If you buy 100 shares and sell 2 calls (both ATM) you'd be short 1 x straddle. To derive the value of your 1 x straddle you'd take the call premium / 2.

In other words, where the forward is trading ATM, then ATM Puts and Calls trade at the same price. Where the forward is trading away from the money you'd need to make an adjustment to determine a conventional straddle value from a synthetic straddle - see a few posts above.

Based on this original poster's numbers the synthetic Put break-even is $ 62.70 (as I said), but the natural equivalent break-even is $ 64.20 (as you said). In this particular case however, the original poster on this thread has got his numders wrong - they simply cannot fly !

p.s. final goodnight...

 

[riskarb]

Gotcha. Good night.

 

[crimson1]

Jan '07 75 Call B/A = 15.10x15.20
Jan '07 75 Put B/A = 10.60x10.80

Better just to long 200 shares and sell 2 75 calls (2xcovered call) vs. original strategy listed on thread. Higher profit and better breakeven.

B/e of 61.20(above) at exp. vs. 62.80 (using bid offer of put which is 20cents lower than originally thought assuming sold at bid...) (original strategy)

If shares >76.30 profit of $3020 vs. $2570
If shares = 75 profit of $2760 vs. $2440
If shares = 70 profit of $1760 vs. $1440
If shares = 65 profit of $760 vs $440
If shares = 60 Loss of $240 vs $560
If shares = 55 Loss of $1240 vs $1560
If shares = 50 Loss of $2240 vs $2560
If shares = 45 Loss of $3240 vs $3560
and so on...

 

[zdreg]

Quote from skaranam:

Sorry of these basic questions. I am trying to understand various strategies. What is the risk involved in a covered short straddle. Here is the trade.

On Friday AAPL closed at $76.30.

JAN 07 $75 CALL - $15.10
JAN 07 $75 PUT - $10.80

I will buy the stock and sell the stradlle. I can keep the premium and surrender stock and collect $7500 , if the closing price is not $75 on Jan 07. I will make 33% profit. What is the risk involved here.

there is no such thing as a covered straddle:

this whole thread is gibberish since the original poster wanted a covered short straddle which does not exist

 

[Don87109]

Quote from Profitaker:

Yep, else there'd be an arb. Agreed, and goodnight.

I don't understand how you can agree that the options are mis-priced. A couple of messages back you calculated the carry cost at 4.1%. If the options were mis-priced wouldn't your carry cost calculation be out of whack? 4.1% sounds pretty reasonable.

What am I missing?

Don