Either I'm retarded or this is a pretty solid strategy

B

badlucktrades

Hi guys, new to the forum here, and no matter which way I look at this, I cant seem to find a negative to this strategy...in the long run. It also ties up some margin (which I didn't consider).

I shorted 198 SPY x 100 shares = $+19800 (less commissions)
Sold 1x 197.50 sept 18 put for credit of 4.70, theta is about 0.06 and delta -0.4ish
bought 3@$1.49 x 200.50 sept 4 calls for debit 4.50.

Trade break down:

Downside - Protected on the downside with the short PUT.
Upside - short stock is protected on the upside with the 3x calls
week to week if the SPY stays above 198, you can close the short put for credit of 0.30 and re-open.

The risk of loss is the 3x calls.

My upside loss area is 198-201.5.If you add in the credit from the put, then its 201.20 for my profit area. So, worst case scenario, is if it hovers in this range. Then i'd have to raise the short put strike.

IF the spy continues to drop, little by little, you can roll the short put strike lower, increasing the spread between the short put and short stock, for the same expiration.

i.e close short put 197.50, open short put 197. this will still cover the premium for the calls, but will cost around 0.20, but the short stock to short put will now be 100.

If come sept 4/5 the spy is still within the 197-202 range, you'll be able to close the 197 put for debit.

Would like for someone to rip apart this trade and get my head out of the clouds here. Only risk I'm seeing is if it stays flat...for the next 3 weeks.
 
You're not retarded. Interesting strategy.

First, you're not protected on the downside with the short PUT. Short any option is either a hedge or naked speculation, not protection. With the put, you're trading away some of your profit potential for probability of success...if the SPY tanks with the short PUT, you'll make less money in that case. But assuming that you don't know where SPY will go, you have increased your chance of making money.

It's possible to break this up in more than one way, but the way that I like to look at it:

1. Short SPY at 198 + short put @197.50 (Sept 18) + long call at 200.5 (Sept 4)

2. Long 2 Sept 4 calls at 200.5

2 is purely speculative. You can think of 2 as being funded by the leftover credit from the first trade. If SPY goes above 200.5 by this Friday, you'll make money and the profit potential is unlimited. However, the profit potential from #2 is gone in a few days and you're left with exposed risk from the calendar spread from trade #1.

As you said, if the market tanks, then trade 2 becomes worthless, your put will eventually get exercised and in effect take away all but $50 of profit from your short SPY stock position. However, the calls go worthless and you get to keep the net credit of $0.20. So you will have made $70. If SPY closes below 197.5 by sept 18. However, you probably would not want to allow the short stock position to go completely naked. And if the market kinda trades in the same range, then those calls will be expensive to replace. But if the market does tank, then you can buy protection or lock in profit relatively cheap.

1. If market takes off immediately. You simply exercise your long call to close out your stock position (take a $300 loss), but gain on trade #2 and close the long put relatively cheap. That would be the best scenario. But if you believe that is going to happen, then just buy some calls. Don't short stock. That's your best scenario.

For all other cases, I don't think this trade would work out so well.

1. If the market trades close to 200.5, then you'll need to keep repurchasing your calls which will be expensive. Or exercise the call to close the short position or buy back stock / sell call depending on what makes sense, and buy a put to close out the short put. The put will have depreciated, but not as fast as your long calls. So overall, you would probably lose money.

2. If market tanks, then your 3 long calls will go worthless. You'd only make $70 on the put assuming that SPY stays below 197.5 until Sept 18. But if you expect the market to tank, then just buy a put.

Sorry, but I don't really see how this trade is better than simpler alternatives. But interesting idea.

Oh, one more thing:

IF the spy continues to drop, little by little, you can roll the short put strike lower, increasing the spread between the short put and short stock, for the same expiration.
More...

Actually, that might cause you to lose more money. Higher puts are more expensive. So by rolling the put down, you'd be taking a debit, not taking a credit. Although you're right that it would increase the potential profit on the short stock position...if the market turns and heads higher, then the profit from the spread decreases at a faster rate than the value of your short put.
 
O
ET180 said:
You're not retarded. Interesting strategy.

First, you're not protected on the downside with the short PUT. Short any option is either a hedge or naked speculation, not protection. With the put, you're trading away some of your profit potential for probability of success...if the SPY tanks with the short PUT, you'll make less money in that case. But assuming that you don't know where SPY will go, you have increased your chance of making money.

It's possible to break this up in more than one way, but the way that I like to look at it:

1. Short SPY at 198 + short put @197.50 (Sept 18) + long call at 200.5 (Sept 4)

2. Long 2 Sept 4 calls at 200.5

2 is purely speculative. You can think of 2 as being funded by the leftover credit from the first trade. If SPY goes above 200.5 by this Friday, you'll make money and the profit potential is unlimited. However, the profit potential from #2 is gone in a few days and you're left with exposed risk from the calendar spread from trade #1.

As you said, if the market tanks, then trade 2 becomes worthless, your put will eventually get exercised and in effect take away all but $50 of profit from your short SPY stock position. However, the calls go worthless and you get to keep the net credit of $0.20. So you will have made $70. If SPY closes below 197.5 by sept 18. However, you probably would not want to allow the short stock position to go completely naked. And if the market kinda trades in the same range, then those calls will be expensive to replace. But if the market does tank, then you can buy protection or lock in profit relatively cheap.

1. If market takes off immediately. You simply exercise your long call to close out your stock position (take a $300 loss), but gain on trade #2 and close the long put relatively cheap. That would be the best scenario. But if you believe that is going to happen, then just buy some calls. Don't short stock. That's your best scenario.

For all other cases, I don't think this trade would work out so well.

1. If the market trades close to 200.5, then you'll need to keep repurchasing your calls which will be expensive. Or exercise the call to close the short position or buy back stock / sell call depending on what makes sense, and buy a put to close out the short put. The put will have depreciated, but not as fast as your long calls. So overall, you would probably lose money.

2. If market tanks, then your 3 long calls will go worthless. You'd only make $70 on the put assuming that SPY stays below 197.5 until Sept 18. But if you expect the market to tank, then just buy a put.

Sorry, but I don't really see how this trade is better than simpler alternatives. But interesting idea.

Oh, one more thing:



Actually, that might cause you to lose more money. Higher puts are more expensive. So by rolling the put down, you'd be taking a debit, not taking a credit. Although you're right that it would increase the potential profit on the short stock position...if the market turns and heads higher, then the profit from the spread decreases at a faster rate than the value of your short put.
More...

Okay, so lets say, the spy completely tanks. i will be able to roll the 197.50 put for an even higher premium which would offset the loss on the original 197.50 put. the excess can be used to purchase a call at the same strike of 200.50(which will be substantially less on a week to week basis). So, at expiration, lets say spy is at 150. the sept 18 197.50 spy will be at -4750, short stock will be ay $4800, sept 25 197.50 put will be worth 4750+ Time value, and the 200.5 calls will be not more than $50. so:

total credit received /unr profit

197.50 sept 18 +470
197.50 sept 25 +4750+ time
-100 @198 = +4800

total debit
200.50 call sept 4 -450
sept 18 short put -4750
200.50 1x call sept 11 -50

? i think this is correct. so, im thinking only the long calls will stack up and thats what i have to protect against?
 
You're short a Sep18 synthetic call for 5.20. Learn synthetics.

You're long the Sep4 calls in an attempt at a small credit, but you're in the diagonal as well. The Sep4 go off and then you're left with a naked short Sep18 call. Sure, you'll cover it on/before Sep4, but where do you think the synthetic Sep18 short call will be trading?

You're long the 1x3 backspread, diagonal. You are actually in at a credit of $0.70, but, come Friday, you have two weeks remaining on your short synthetic call.

Makes zero sense to me. Best-guess is a $200-$250 loss on the position come Friday. All with everything; rolling makes NO sense. It's the worst form of cognitive dissonance applied to trading.
 
destriero said:
You're short a Sep18 synthetic call for 5.20. Learn synthetics.

You're long the Sep4 calls in an attempt at a small credit, but you're in the diagonal as well. The Sep4 go off and then you're left with a naked short Sep18 call. Sure, you'll cover it on/before Sep4, but where do you think the synthetic Sep18 short call will be trading?

You're long the 1x3 backspread, diagonal. You are actually in at a credit of $0.70, but, come Friday, you have two weeks remaining on your short synthetic call.

Makes zero sense to me. Best-guess is a $200-$250 loss on the position come Friday. All with everything; rolling makes NO sense. It's the worst form of cognitive dissonance applied to trading.
More...
what about the short stock i have there. not trying to prove the startegt, just trying to see if im not seeing something that should be obvious.
 
You must log in or register to reply here.
Back
Top