Spreads versus Butterfly

[poopy]

What are the chances of the short wing of the butterfly getting exercised early if itm on the expiry date?

Example the AUG23 MARA 18/17.50/17 PUT
Price right now is $17.25

Almost 0.

 

[poopy]

Eureka! If the price goes up then the long stock is acting like a call option....and if the price goes down the long put stops the losses at the cost of the put...ie the same as the call option would stop losses at the cost of the call!

But this isn't an equitable relationship right?
Both options have extrinsic value, so will gain more and lose less relative to the stock position?

I think this is how MM hedge...they buy calls to attain 0 delta on a short stock position, so if price drops the long calls, due to their extrinsic value, will lose less than the short position gains...so they make $ on the difference when they re-center to 0 delta.

Just stop. You're wrong.

 

[wxytrader]

Just stop. You're wrong.

No I'm not...on either!

Look at the pnl profile. The maximum loss is the cost of the puts....after that the puts will offset the stock losses. The maximum gain is unlimited. That's exactly the same as a call option.

I'm also not wrong about a long call option losing less value than a short stock position gains value after a drop because of extrinsic value. If the stock drops $2 the long call will not lose @2 in value...it will lose something less prior to expiration.

Let's not forget I was the one who pointed out that indirectly option prices do adjust for trend reversals via the skew/smile where you pay relatively more for OTM than ITM. I haven't looked at it yet but I assume that the skew in OTM puts will increase the longer an uptrend continues...and will decrease in OTM calls....the greatest skew being within 1 SD. Anyone confirm?

 

[poopy]

Long synthetic (short put + call at same strike) = shares. Financing is embedded in the synthetic so it may trade off a bit from the shares, but ignoring the aforementioned they are equal. These arbs enforce parity.

Forward at 102. Shares at 102. The 100C is worth 4. What is the value of the 100P(x)? Solve for x.

 

[poopy]

Eureka! If the price goes up then the long stock is acting like a call option....and if the price goes down the long put stops the losses at the cost of the put...ie the same as the call option would stop losses at the cost of the call!

But this isn't an equitable relationship right?

Both options have extrinsic value, so will gain more and lose less relative to the stock position?

I think this is how MM hedge...they buy calls to attain 0 delta on a short stock position, so if price drops the long calls, due to their extrinsic value, will lose less than the short position gains...so they make $ on the difference when they re-center to 0 delta.

It is, you microcephalic.

 

[poopy]

No I'm not...on either!

Look at the pnl profile. The maximum loss is the cost of the puts....after that the puts will offset the stock losses. The maximum gain is unlimited. That's exactly the same as a call option.

I'm also not wrong about a long call option losing less value than a short stock position gains after a drop because of extrinsic value.

Let's not forget I was the one who discovered that indirectly option prices do adjust for trend reversals via the skew/smile where you pay relatively more for OTM than ITM. I haven't looked at it yet but I assume that the skew in OTM puts will increase the longer an uptrend continues...and will decrease in OTM calls....the greatest skew being within 1 SD. Anyone confirm?

Archived.

 

[wxytrader]

Long synthetic (short put + call at same strike) = shares. Financing is embedded in the synthetic so it may trade off a bit from the shares, but ignoring the aforementioned they are equal. These arbs enforce parity.

Forward at 102. Shares at 102. The 100C is worth 4. What is the value of the 100P(x)? Solve for x.

How can it equal shares ? If a stock moves $1 the options will only move the Delta, and will have extrinsic value before expiry. This is why you have to keep adjusting for delta neutrality.

 

[poopy]

How can it equal shares when there is still extrinsic value in the options? If a stock moves $1 the options will only move the Delta, and will have extrinsic value before expiry. This is why you have to keep adjusting for delta neutrality.

The put and call have the same extrinsic value. You're long the call and short the put so the extrinsic val cancels which results in D1/shares.

 

[wxytrader]

Archived.

re-archive as I updated it with an example.

 

[poopy]

re-archive as I updated it with an example.

You removed the word "discovered" with the phrase "pointed out"