How do you understand this options trade?
- Thread starter Farbert
- Start date
Here is my explanation:
he sold the 2$ short and to reduce the cost of margin he bought the 3$ call. I do this all the time though not with those kind of numbers obviously. It reduces the capital outlay required for the trade enormously.
he sold the 2$ short and to reduce the cost of margin he bought the 3$ call. I do this all the time though not with those kind of numbers obviously. It reduces the capital outlay required for the trade enormously.
Who's the one who did the trade? Can he/she confirm here?
Oh, yup, you nailed it...but this was definitely one of those charts that doesn't match up with the T&S like you'd expect it to.
Here's the action on the underlying with the hedge (the trade was actually completed at 35:44, and reported at 36:14. Also, the giveaway here is that it was sold under parity. For that to have been a buy, the underlying would have needed to be trading at 2.38
WTF. You wrong. Laughably.
Any spread reduced capital outlay. The ticket was generated by someone BUYING the 2/3 call vertical.
The 2C was filled 0.02 off the ask. The spread was easily marketable as a smaller debit which alludes to paper paying 0.40 for the bull vertical.
The margin requirement varies per broker - there is no way of knowing what the person's situation was doing the trade but a random margin calculator will tell you that buying the 3$ call when you short the 2$ call saves you 20K in margin. You will be right in saying you can have a better deal with your broker - the amount of value in the 3$ option makes the reduction of capital in a long vertical spread trivial (<3k). Apart from that there is Beerntrading's info on the stock price at the time of the trade which would seem to support my opinion.
I use these kind of cheap hedges a lot when trading the pinning of a stock on expiration Fridays. Usually you get positions like these:
XYZ @ 200.64
BTO 10 C XYZ 195 @ 5.75
STO 40 C XYZ 200 @ 1.12
debit 1.27$
Now if you dont hedge this with a 30 C XYZ 205 (or 210) you get whacked with 120K in margin - hedged it costs only 3K in margin or so. Although the guy in the example is trading for pennies he must have made a similar reasoning. Your opinion that its a purchased vertical doesnt make trading sense to me - he might as well just have gone long the call and not sold his over 3$ profits for a measly few pennies. However if you have a better logic of course its interesting to hear.
LOL you are editing after the fact and adding more expletives as we go along. Fine I am wrong - doesnt bother me - OP asked a question, I gave my considered opinion and you disagree. Peace.
He only disagrees with the assertion that the initiater of the trade sold the call spread. Likely he bot as he gave up like 20 cents of edge.
I didn’t add/delete expletives. Produce the screengrab.
Anyone with any experience would agree with me. The idea that paper initiated a credit of five cents off the offer on the 2C is ludicrous.
I agree with Jules that the credit spread would benefit in reducing the haircut over shorting the naked call, but there is no appreciable vol here as the $3 call sold for $0.03
Paper could have bought the $3 put for a dime over intrinsic. So much for saving on the haircut.
No MMer is going to buy that vert at five cents under the offer. Paper initiated a long vert from 0.40.
Jules—read more; type less. You’ll look less foolish.
Paper could have bought the $3 put for a dime over intrinsic. So much for saving on the haircut.
No MMer is going to buy that vert at five cents under the offer. Paper initiated a long vert from 0.40.
Jules—read more; type less. You’ll look less foolish.