cover a short put with a long put ?

C

cpphey

Can you sell a put at $55 and buy the same put $50 (given same expiration) your max downside is $5 per option contract ( or 5 * 100 since there are 100 underlying in 1 contract )
 
lol could you buy call for 100k dollers and then sell it at expiry for 0. max downside is 100k and max upside is infinity minus 100k so nearly infinte?
 
If I read your question correctly, you're trading a credit spread so "Yes", you can.

Example:
Sell $55 put for 1.30
Buy $50 put for .70
Collect .60 and keep as long as stock closes above $55 @ expiration.

***Max loss >> 5 minus .60 = 4.40 (without commissions)

***If you're an experienced options trader then you know this & I read your question wrong.
 
@Bum , Correct me if I am wrong but you are missing the multiplier in your "Max loss" calculation since the loss will be per stock (underlying) and not per option contract right ?

1 option contract = 100 stock
If Stock price is below 50, then $5 has to be given per stock i.e. 5 * $100 = $500
We have to subtract the option premium we got, i.e. 1.30 - 0.70 = 0.60

Therefore, net loss is $500 - $0.60 = $499.40

Please let me know if you agree.

And no, I am not a super experienced options trader.
 
cpphey said:
@Bum , Correct me if I am wrong but you are missing the multiplier in your "Max loss" calculation since the loss will be per stock (underlying) and not per option contract right ?

1 option contract = 100 stock
If Stock price is below 50, then $5 has to be given per stock i.e. 5 * $100 = $500
We have to subtract the option premium we got, i.e. 1.30 - 0.70 = 0.60

Therefore, net loss is $500 - $0.60 = $499.40

Please let me know if you agree.

And no, I am not a super experienced options trader.
More...

Max loss in "option" dollars = $5- $.60 = $4.40 per option
Convert loss to "real" dollars = $4.40 x 100 = $440 per option (1 option = 100 shares)

So in the example I gave, you would sell 1x$55 put for $1.30 ($130), buy 1x$50 put for $.70 ($70) for a total credit of $60 ($130-$70). If price closes @ $56 you keep the $60. If price closes @ $49 you lose $440. This is assuming you don't make any changes before expiration.

***For futures contracts 1 option = 1 futures contract
***For stocks 1 option = 100 shares of stock
***Probably easiest to do the multiplier last so use the option prices first then move the decimal 2 spots at the end.
***In your calculations you converted the $5 to $500 but didn't convert the $.60 to $60. Convert all option prices at once or wait till the end.
 
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if im understanding you correctly this would imply an arbitrage opportunity which i define as a risk reversal free profit. no you cant for the following reason. the price is concave in spot at mid (and you have to pay bid offer) so you could not get such attractive pricing arrangements with strikes 5 apart.
 
and before anyone suggests it any skew which would allow such pricing would not preserve certain strat like qualities which are required to keep sh1t together
 
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