Am buying some protective puts in advance of cashing out of a large BMY stock position in 2016. In this screen shot, it looks like I can get the protection for a lot less money if I buy a higher strike. In other words, if I put up more money to buy the 75 puts for Jan, I will pay 47 cents for the actual protection (extrinsic value). If I buy 65 puts, I pay 2.47. I think I understand why the price is different (Imp Vol and all that), but am I understanding this correctly? If I have the capital to pay the higher cost, and the foregone interest on that capital is close to zero anyway, is it not an obvious choice to buy the 75 (or higher) strikes. I would get most of the cost back in intrinsic value when I exercise in Jan. Please correct me if I am wrong. Jay
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Cost of Protective Puts
- Thread starter Jay Hattler
- Start date
You are looking at the calls. The price for the protective puts are on the right (roughly $5 for the 65 and 14 for the 75 strike).
I should have been clearer in my first note. I am trying to look at the puts. If I bought the 75 strike today for $14.00 and the stock did not move until Jan, I could exercise the 75 put, receive $75 and exit the position. My actual cost for having this protection for three months would be the $14 I paid for the 75 strike, minus the difference between the 75 strike and today's price. That difference is about 47 cents, the current extrinsic value. This seems very cheap to me. Since I have the capital to purchase the higher strike, I would just like to confirm that my understanding about the pricing of the puts is correct.You are looking at the calls. The price for the protective puts are on the right (roughly $5 for the 65 and 14 for the 75 strike).
I should have been clearer in my first note. I am trying to look at the puts. If I bought the 75 strike today for $14.00 and the stock did not move until Jan, I could exercise the 75 put, receive $75 and exit the position. My actual cost for having this protection for three months would be the $14 I paid for the 75 strike, minus the difference between the 75 strike and today's price. That difference is about 47 cents, the current extrinsic value. This seems very cheap to me. Since I have the capital to purchase the higher strike, I would just like to confirm that my understanding about the pricing of the puts is correct.
That is correct.
You are going to pay a big bid ask to put that on. If you are just looking to lock in the price, buy the ATM put and sell the ATM call. Locked in price with no premium.
IF he gets audited the IRS will consider that a constructive sale and tax him in 2015.
Am buying some protective puts in advance of cashing out of a large BMY stock position in 2016. In this screen shot, it looks like I can get the protection for a lot less money if I buy a higher strike. In other words, if I put up more money to buy the 75 puts for Jan, I will pay 47 cents for the actual protection (extrinsic value). If I buy 65 puts, I pay 2.47. I think I understand why the price is different (Imp Vol and all that), but am I understanding this correctly? If I have the capital to pay the higher cost, and the foregone interest on that capital is close to zero anyway, is it not an obvious choice to buy the 75 (or higher) strikes. I would get most of the cost back in intrinsic value when I exercise in Jan. Please correct me if I am wrong. JayView attachment 157751
View attachment 157751
I would do a Put debit spread at a strike 1 or 2 strikes away from current price on the long and 3/4 strikes away on shorts, you looking to cover yourself for short duration, so might as well do so at lowest cost or even come out ahead. Have a logical stop on the stocks so when price gets there the long put is already profitable, take the loss on the stocks and keep debit spread till showing enough to cover loss on stocks. If stock price does continue to go direction you want, lift the long Put but keep the shorts on to cover losses on the long, so you end up getting insurance without much or even small gain.
I would do a Put debit spread at a strike 1 or 2 strikes away from current price on the long and 3/4 strikes away on shorts, you looking to cover yourself for short duration, so might as well do so at lowest cost or even come out ahead. Have a logical stop on the stocks so when price gets there the long put is already profitable, take the loss on the stocks and keep debit spread till showing enough to cover loss on stocks. If stock price does continue to go direction you want, lift the long Put but keep the shorts on to cover losses on the long, so you end up getting insurance without much or even small gain.
Handle123,
This sounds very interesting. I will look at this closely. At the same time, since newwurldmn has taught me about the Constructive Trade issue, wouldn't this debit spread have the same problem. Indeed, won't any two-sided position (i.e., something other than a protective put) have the same problem, since I happen to be doing this over the year's end?
Thank you for your advice
You are going to pay a big bid ask to put that on. If you are just looking to lock in the price, buy the ATM put and sell the ATM call. Locked in price with no premium.
minmike,
Since I plan to exercise the puts or let them expire (on the slim chance that BMY was above $75.00 next January), do I need to worry about the bid/ask spread? Going back to my screenshot, if I buy the 75's at the Mid ($13.50), then I have the protection for 47 cents, regardless of what the spread is later on. If I can't quite hit the Mid, my original question was that I am still paying a lot less than the $2.47 that I would pay for the 65's.
Thank you
Handle123,
This sounds very interesting. I will look at this closely. At the same time, since newwurldmn has taught me about the Constructive Trade issue, wouldn't this debit spread have the same problem. Indeed, won't any two-sided position (i.e., something other than a protective put) have the same problem, since I happen to be doing this over the year's end?
Thank you for your advice
A constructive sale is when you economically remove the risk from a trade. Buying an SP500 index fund and shorting SPY would be the same. Being long SPY and buying 300 strike puts would also qualify. This is really only a risk if you are audited, but it would be better to talk to an accountant as the rules are fuzzy.
I would think the putspread would create an economic risk which would make it not a constructive sale.