Discuss my LEH spread

U

u21c3f6

Yesterday (6/14/07) I executed the following order: (LEH - Lehman Bros)

Sold 3 LEH Oct 75 puts
Bought 3 LEH Oct 70 puts
for a credit of $1.35

What do you think of it good or bad and/or what would you have done differently and why?

In addition, now that the trade is in place, what thoughts and/or advice would you give as to how to manage the trade if it moves against me or for me.

Joe.
 
The biggest issue I have with this spread is that it has 126 days to expiry, so Theta is virtually non-existent and it will remain that way for the next 2 months. Personally, I prefer to trade this kind of spreads with no more than 45 days to expiration.
 
MTE, Would you have a different opinion if you believed that the price of LEH was going to increase in the near term?

Can you give me an idea of how much theta you would require for a trade 45 days til exp.

Joe.
 
Quote from u21c3f6:

MTE, Would you have a different opinion if you believed that the price of LEH was going to increase in the near term?

Can you give me an idea of how much theta you would require for a trade 45 days til exp.

Joe.
More...

I think his opinion would be reinforced that it has too much time to expiration if your expectation was for move in the near-term. The spread has little delta and theta given the time to expiration so unless LEH makes a really strong move higher, the credit spread will not budge too much. Don't foget that the option you are selling and buying for OCT both have significant time value premium which works against each other for this spread.

These spreads work better with short time to expiration and a July spread might have worked better if you expect a short-term move. Credit spreads can be direction of course but if you are traidng a specific direction then ATM or slightly OTM bull call might have a better risk reward than the OTM credit/ITM debit.
 
"These spreads work better with short time to expiration and a July spread might have worked better"

Thank you for the replies. Can you give me an example of the above with a discussion of the theta compared to my trade?

Joe.
 
Quote from u21c3f6:

"These spreads work better with short time to expiration and a July spread might have worked better"

Thank you for the replies. Can you give me an example of the above with a discussion of the theta compared to my trade?

Joe.
More...

Do you have an option analysis tool? (If you don't then get it.) Just stick in the trades and see how the spreads behave when you change the stock price and/or time to expiry.

The Oct spread has a theta of about 0.2 and the July spread has a theta of about 1.0. So if the stock moves up to, say, 83 in 2 weeks then the Jul spread would be pretty much worthless, while the Oct one would still have considerable value (the profit would be slightly less in Oct spread, which would also have a wider bid/ask spread). If the stock stays flat, though, then the Jul spread would still decay to virtually zero, while the Oct one would lose about a nickel.
 
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