I need help managing a bull put; I did not fully understand the trade.

[klattermusen]

Hello

I need help managing a bull put; I did not fully understand the trade.

The stock is PBR. I SOLD the 11put and BOUGHT the 10put. Expires Nov 25. I got a credit of .40 It's currently .70. So if I bought a bear put to close out the position I would be underwater almost 100%. Stock price is 11.30 right now. The stock goes ex-div on Tues nov 22 for $1.30. I imagine the price will drop from whatever the close is at on Monday nov 21 by that amount on Tues morning. So I could be looking at sub $10.

I think the stock gets assigned to me if the stock price is between 11 and 10 by op-ex on Nov 25. I did not know that. Now I do. My fear is my losses could get to be lot more depending on how it closes and could even gap down once I'm assigned the shares.


I'm hoping for a possible pop in the stock price monday since any shorts who have not covered yet will likely do so for fear of being stuck with the rather large dividend.

I'm pretty good at admonishing myself for not seeing all the problems potentially before entering the trade....but any ideas/strategies would be appreciated.

Thanks

 

[taowave]

Assigned or not,your risk is .60...
You have the 10 put protecting you.

Doubt you get assigned,and if you do it's no big deal..You will be in a synthetic call,i.e. Long stock,long the 10 put..

 

[newwurldmn]

Hello

I need help managing a bull put; I did not fully understand the trade.

The stock is PBR. I SOLD the 11put and BOUGHT the 10put. Expires Nov 25. I got a credit of .40 It's currently .70. So if I bought a bear put to close out the position I would be underwater almost 100%. Stock price is 11.30 right now. The stock goes ex-div on Tues nov 22 for $1.30. I imagine the price will drop from whatever the close is at on Monday nov 21 by that amount on Tues morning. So I could be looking at sub $10.

I think the stock gets assigned to me if the stock price is between 11 and 10 by op-ex on Nov 25. I did not know that. Now I do. My fear is my losses could get to be lot more depending on how it closes and could even gap down once I'm assigned the shares.


I'm hoping for a possible pop in the stock price monday since any shorts who have not covered yet will likely do so for fear of being stuck with the rather large dividend.

I'm pretty good at admonishing myself for not seeing all the problems potentially before entering the trade....but any ideas/strategies would be appreciated.

Thanks

The div is and likely always was priced into the option spread. Your best option is to close the trade. You are right about the risk of the stock being between 10 and 11 and you assigned shares and then the stock craps out the following monday (of course it can go the other way too).

This is not a decision you will have to make until 11/25. If you are assigned on your 11 strike put before then, you will be long a synthetic call (as tao said) which has the same risk as the putspread but unlimited upside.

 

[BlueWaterSailor]

Well, for one, don't enter a trade if you can't take the worst-case heat that may come with it. But there's essentially zero chance of you being assigned unless your broker is some shady guy in a dark alley who also touts horses and sells "real" Rolexes for $30 on the side: any normal one will simply cover you by auto-exercising your long. As @taowave points out, your max risk is 0.60 - that's it. If it bothers you, get out ahead of time and keep whatever few pennies are left of the extrinsic in your trade - so it would be less than a $60 loss. In fact, since you seem unfamiliar with what happens at expiration, with divs, etc., you should be doing that - getting out before expiration - every time. But overall, you're fairly safe. Don't worry about it too much.

P.S. My bad - from the panicked tone, I thought you were just short and started writing it with that in mind. Your max exposure is, of course, $1060 if the price lands between the strikes (i.e., doesn't go past your long.) But getting out is still the right answer.

 

[klattermusen]

Thank you. I'm with IB. Appreciate the hand holding

If we get a mild oil bounce monday and some shorts cover pre-ex div the bump up in the price of the stock should let me get out even. My preferred hope.

 

[BlueWaterSailor]

If we get a mild oil bounce monday and some shorts cover pre-ex div the bump up in the price of the stock should let me get out even. My preferred hope.

"Hoping" and "wishing" are very poor strategies. Unless you're OK with any of the possible outcomes - and you should really consider if you are, and what you will do if and when - then getting out is still your best bet.

 

[ktm]

I don't think what you did was as much of "failing to see a problem" (as you wrote) as much as it was just not knowing it was going ex div.

When something just looks super juicy and too good/easy to be true, it's always best to do some digging before getting in.

 

[TheDawn]

PBR again?? You are obsessed with this stock, aren't you? LOL Your question is always with PBR. LOL

You can keep the long put open so if the price goes down to below $10, your long put might become ITM. And depends on how this stock behaves usually after an ex-dividend, you can try to buy a call to get in on a possible ride up if it rides up a lot usually after ex-div or sell a put again if it doesn't move up a lot afterwards. If you expect the bounce back is going to happen on Monday, then go calendar as well.

This is what I would do.

 

[misterkel]

I don't think what you did was as much of "failing to see a problem" (as you wrote) as much as it was just not knowing it was going ex div.

When something just looks super juicy and too good/easy to be true, it's always best to do some digging before getting in.

Right. Best sign of ex-div is unbalanced option chain. IE, puts cost significantly more than calls.
Solution - have ex-div date on your ticker info bar in your options chains.

 

[taowave]

Hes definetly keeping the long put..Thats the whole purpose of selling the spread...

If you are suggesting buying the 11 call for .01 to .03,thats OK...Why should he sell a put??

Calanders look reasonable

PBR again?? You are obsessed with this stock, aren't you? LOL Your question is always with PBR. LOL

You can keep the long put open so if the price goes down to below $10, your long put might become ITM. And depends on how this stock behaves usually after an ex-dividend, you can try to buy a call to get in on a possible ride up if it rides up a lot usually after ex-div or sell a put again if it doesn't move up a lot afterwards. If you expect the bounce back is going to happen on Monday, then go calendar as well.

This is what I would do.