Interesting situation in an Option

[nitro]

ktm,

As to agreeing with HD, see my comments above. As to the 10% fall between now and expiration, that I have no problem with, and even though for this position all the beta and delta and greek stuff is irrelevant, I wanted to still expand on why I think it very possible that it could drop 10% and to get feedback on that part of my general options strategy.

I am confused about your expiry example. AFAIK, this spread is 100% risk free _AT_EXPIRATION_!

nitro

nitro,

I agree with HD here as well. While I don't speak Greek, my emphasis would be on expanding the winodw of profitability. As written, IF you are able to leg in for $10, you still have the costs of getting in and out plus the logistics of exercise (and you need at least a 10% drop).

The $10 call you sell is going to net you a long position in the stock over the (expiry) weekend, so you would have to sell it Monday AM at a comparable price to realize the final return. That's the only problem if you are sub $20. Above $20, you might have the $20 call to deal with too. Under .75 at expiry and exercise is not automatic. You would have to exercise the call under that level to make sure the broker doesn't leave you with just the long stock position.

Just some stuff to think about...Good Luck.

 

[nitro]

Pat,

This trade, as I (tried) to explain above, if put on as a spread at the prices mentioned, has zero risk. All I could lose is comissions.

The hard part is putting on the spread as mentioned. However, notice that I should be able to get ABI's 20 Sep strike for 2.00 rather easily on Tuesday, and selling the 10 strike for 12 only requires the stock to move another .26 to the upside! (since it's delta is nearly 1.)

As for your suggestion that if I believe the stock is going down, why not buy the put and go long the stock, that is not a bad idea. Two things though. If all I was interested in was getting short the stock, I could sell it on Tuesday, or I could buy the deep in the money put. The idea of this trade is that I lose NOTHING if the stock goes up (comissions) but I participate in any move of 10% or greater down in the stock. The idea is that the risk/reward of this trade is phenomenal - if I could find 100 stocks with the same relation as this one, I am nearly certain that over the cost of all 100 in comissions, I would do no worse than break even, and potentially have HUGE upside.

nitro

Neospecialist wrote:

The better question relates to your ability to time the short term-market in "legging "into your spread. If you buy the higher strike first and the stock turns down
you are merely long and" hoping and praying".

Comes down to "trading and direction" as you wrote in another thread.

Ktm wrote:

The $10 call you sell is going to net you a long position in the stock over the (expiry) weekend, so you would have to sell it Monday AM at a comparable price to realize the final return. That's the only problem if you are sub $20. Above $20, you might have the $20 call to deal with too. Under .75 at expiry and exercise is not automatic. You would have to exercise the call under that level to make sure the broker doesn't leave you with just the long stock position.

Certainly something to conceder. You're not selling any premium so a simple approach could be buying the sept 25 put and long the stock. You think the stock will drop (direction), if it does sell the stock, no uptick needed, and buy it back lower.(trading) If by some miracle the stock goes over 25 and change you make money.

 

[nitro]

Error,

Yeah, the real risk is in legging into this spread.

Thanks for the rest of the tips.

nitro

Quote from Error 404:



Perfectly said.

Any spread you try to leg into becomes a trade with the same risks as any other opening position. Your anticipation of the performance of the underlying issue becomes your trade. The strategy then becomes a superfluous issue. A straight buy or sell will always be better than a spread if your predictions on price action come to pass.

As a side note, I have noticed that price quotes on the CBOE have become less and less relevant. Perhaps fine for one contract. But useless for anything more. I have left day orders out for OEX spreads recently with zero fills on 40 or 50 contract orders. Spreads have become a joke. Could have been my order room sucked (it did), but still, I would see a dollar spread (B/A) and try and buy at $.50. Then go to $.70, etc. Unless I were willing to pay the whole dollar, it is "nothing done" at the end of the day every day. In years past, I would have gotten filled on them all with a spread of a sixteenth. Now my orders just sit. I have given up on them entirely.

Peace,
RS

 

[Hello_Dollars]

Nitro,

A couple points. What makes this an ITM bear call spread is that you'd be selling a call that's in the money (in this case, deeply so). An OTM bear call spread would be comprised of a short and long call that are both out of the money (i.e short Sep 22.5 c/long Sep 25 c).

Also, I checked out the specific options in question and have a couple other problems with the trade. First, it appears that the Sep 10 calls have zero open interest. I'm not a big proponent of trading illiquid options, especially when going short.

Second, I wouldn't minimize the risk of early assignment given that the bid-ask split of the Sep 10's is essentially at parity.

Third, I think it's incorrect to say that the trade has no risk. That presupposes a specific directional movement (or series of movements) in the underlying and an ability to leg in at your desired prices, which is far from certain. But more importantly, it seems to me that there are better alternatives to capitalize on your market outlook that would present a better risk-reward profile.

Three simple alternatives include a long put position, a bear put spread or a ratio put spread. All three have the advantage of being positive vega trades, which is probably what you want given the current rock bottom IV. The last one has the added advantage of being positive theta and, assuming you put on the trade for a net credit, would allow you to profit even if the underlying failed to move as expected. Lastly, all the ABI puts have substantially greater open interest than the corresponding calls, thus providing greater liquidity.

Just my 2 cents.

Regards,

HD

 

[murray t turtle]

Quote from patefern:

Neospecialist wrote:

The better question relates to your ability to time the short term-market in "legging "into your spread. If you buy the higher strike first and the stock turns down
you are merely long and" hoping and praying".

Comes down to "trading and direction" as you wrote in another thread.

Ktm wrote:

The $10 call you sell is going to net you a long position in the stock over the (expiry) weekend, so you would have to sell it Monday AM at a comparable price to realize the final return. That's the only problem if you are sub $20. Above $20, you might have the $20 call to deal with too. Under .75 at expiry and exercise is not automatic. You would have to exercise the call under that level to make sure the broker doesn't leave you with just the long stock position.

Certainly something to conceder. You're not selling any premium so a simple approach could be buying the sept 25 put and long the stock. You think the stock will drop (direction), if it does sell the stock, no uptick needed, and buy it back lower.(trading) If by some miracle the stock goes over 25 and change you make money. [/QUOTE
=====

[1]Looks like the stock {ABI} and ,$ 20 strike,especially $10 strike all look expensive and top heavy.Higher priced puts look cheap,especially index options, especially longer time frame.

[2]Haven't double checked you math or the sector,both of which i would do on any swing or position trade;
at least your kid would get the paperwork on the trade!!!




[3] Even though i trade with trend =friend;
Bloomberg noted something recently- September tends to be sideways or down. Noticed that even in [DIA, SPY, QQQ ]bull markets.

[3.3]Comparing equity index options to international flights or straddling a barbed fence-PREFER more time,no last minute rush.

[Ps]There are medical proofs for miracles & prayer;
time is the biggest unknown there also. Cant rush some things.

 

[nitro]

You know, this is the first post of yours where I have understood what you were talking about.

I don't disagree with any of it, except that my kid would get all the paperwork.

nitro

Quote from murray t turtle:

...

[1]Looks like the stock {ABI} and ,$ 20 strike,especially $10 strike all look expensive and top heavy.Higher priced puts look cheap,especially index options, especially longer time frame.

[2]Haven't double checked you math or the sector,both of which i would do on any swing or position trade;
at least your kid would get the paperwork on the trade!!!




[3] Even though i trade with trend =friend;
Bloomberg noted something recently- September tends to be sideways or down. Noticed that even in [DIA, SPY, QQQ ]bull markets.

[3.3]Comparing equity index options to international flights or straddling a barbed fence-PREFER more time,no last minute rush.

[Ps]There are medical proofs for miracles & prayer;
time is the biggest unknown there also. Cant rush some things.

 

[ktm]

Quote from nitro:

ktm,

I am confused about your expiry example. AFAIK, this spread is 100% risk free _AT_EXPIRATION_!

nitro

If the stock is at $19 on expiration Friday, what happens?

Your $20 (bought) call expires worthless.

Your $10 (sold) call is either:

1. Bought back by you. If so, you will be paying the spread and probably some premium too, given zero open interest and other factors.

2. Allowed to expire in the money. Your broker will then put you in a long position and debit your account $10. Monday morning, when the market opens, you will have a long position in the stock. There is risk of a gap down, since it will have dropped more than 10% between now and then.

 

[nitro]

HD,

Ok, I guess I am a little confused about "moneyness" on spreads because for a spread, there are two prices that could be in/out of the money, and in my case, there are more than 1 that is in-the-money. LOL.

I see your points about your strategy. I am thinking deeply and trying to read between the lines of what you have said.

One thing that fascinates me about this spread is that if I buy 2 Sep '03 10 calls (exiting the short 10 and now long 1) and sell 2 Sep '03 15 calls, I can turn this vertical bear call spread into a long fly. Alternatively, I can buy 2 Sep '03 15's, sell 2 20's (exiting the long twenty and now short 1) and turn it into a short fly! (The problem though, as you have stated, is that the 10 call is at parity and causes the risk of assignment when short it.)

From what I have read about/from Saliba, that was his main motivation for using flies and condors - they are very flexible options positions, and legging out of them turns them into something else in the intermeditate term (synthetically.) The reson being because the butterfly spread consists of a bull spread and a bear spread, one spread may reach its maximum profit, just as in the case where I can put on my original trade described in my first post!!!!!!!

The problem I think is the B/A spread and the comissions getting into these things.

From what I have been reading, butterflies are one of the few (if not the only one) spread that allows for safe execution of legging out of a spread. Fascinating...

nitro

Quote from Hello_Dollars:

Nitro,

A couple points. What makes this an ITM bear call spread is that you'd be selling a call that's in the money (in this case, deeply so). An OTM bear call spread would be comprised of a short and long call that are both out of the money (i.e short Sep 22.5 c/long Sep 25 c).

Also, I checked out the specific options in question and have a couple other problems with the trade. First, it appears that the Sep 10 calls have zero open interest. I'm not a big proponent of trading illiquid options, especially when going short.

Second, I wouldn't minimize the risk of early assignment given that the bid-ask split of the Sep 10's is essentially at parity.

Third, I think it's incorrect to say that the trade has no risk. That presupposes a specific directional movement (or series of movements) in the underlying and an ability to leg in at your desired prices, which is far from certain. But more importantly, it seems to me that there are better alternatives to capitalize on your market outlook that would present a better risk-reward profile.

Three simple alternatives include a long put position, a bear put spread or a ratio put spread. All three have the advantage of being positive vega trades, which is probably what you want given the current rock bottom IV. The last one has the added advantage of being positive theta and, assuming you put on the trade for a net credit, would allow you to profit even if the underlying failed to move as expected. Lastly, all the ABI puts have substantially greater open interest than the corresponding calls, thus providing greater liquidity.

Just my 2 cents.

Regards,

HD

 

[nitro]

Ugh,

I get it. I don't understand the "...debit your account $10" in case 2) below though - where is that coming from? I got $10 credit for putting this spread on? Wouldn't the reduction be $9 in the case where the stock is at 19?

nitro

PS EDIT - Waaaaaaaaaaaaaaaaaait! I have a counterpunch. I sell MOC the stock twenty minutes to close on expiration Friday if the stock is below 20

Quote from ktm:



If the stock is at $19 on expiration Friday, what happens?

Your $20 (bought) call expires worthless.

Your $10 (sold) call is either:

1. Bought back by you. If so, you will be paying the spread and probably some premium too, given zero open interest and other factors.

2. Allowed to expire in the money. Your broker will then put you in a long position and debit your account $10. Monday morning, when the market opens, you will have a long position in the stock. There is risk of a gap down, since it will have dropped more than 10% between now and then.

 

[GATrader]

This is getting way too complicated. Remember the original purpose- to capitalize on a percieved downmove. With 2-4 days to go, if stock is hovering where it would take a 3 sigma event to either 20 or 10, you'd just buy the equal amt of stock you'd get exercised on the short 10 call or better yet, try to buy back the short call at parity so you could "ride a free call lottery ticket" probably with a delta of 1% for 2-3 days. You have little risk since you sold spread for full value.