Where is my mistake?

W

weinkoeln

Hi everyone,

I would like to hear your opinion about the following trade (I did it on Friday, all figures are real):

Buy KMB @136.38
Sell KMB Call, Strike 136, Exp. 10.09., @1.5
Buy KMB Put, Strike 136, Exp. 10.09., @1.9

KMB will go Ex–DIV on Sep 09, DIV is 1,14.

If I am not mistaken, the P&L will be in any case 0,36.

What I am missing ?
 
Sorry, this was my mistake being German :-)
Expiry is September, 10 (in German one would write 10.09. … ). Given that my stocks will not be called away (what is unlikely as the calls are ATM), I‘ll own the stocks at EX-Date.
 
Exactly, that is the risk. If the calls are an early exercise.

weinkoeln said:
Sorry, this was my mistake being German :)
Expiry is September, 10 (in German one would write 10.09. … ). Given that my stocks will not be called away (what is unlikely as the calls are ATM), I‘ll own the stocks at EX-Date.
More...
 
weinkoeln said:
Hi everyone,

I would like to hear your opinion about the following trade (I did it on Friday, all figures are real):

Buy KMB @136.38
Sell KMB Call, Strike 136, Exp. 10.09., @1.5
Buy KMB Put, Strike 136, Exp. 10.09., @1.9

KMB will go Ex–DIV on Sep 09, DIV is 1,14.

If I am not mistaken, the P&L will be in any case 0,36.

What I am missing ?
More...

If the call gets exercised before the div date you will lose 70 cents.

Market is giving you about a 30percent chance of that happening.

Of course you are paying financing as well for the month in a half you are holding the position. If you are doing this on margin it could be substantial. If you are doing it with cash it probably isn’t.
 
weinkoeln said:
Sorry, this was my mistake being German :)
Expiry is September, 10 (in German one would write 10.09. … ). Given that my stocks will not be called away (what is unlikely as the calls are ATM), I‘ll own the stocks at EX-Date.
More...

If the stock is > than 138 I think you will be called away.
 
weinkoeln said:
Hi everyone,

I would like to hear your opinion about the following trade (I did it on Friday, all figures are real):

Buy KMB @136.38
Sell KMB Call, Strike 136, Exp. 10.09., @1.5
Buy KMB Put, Strike 136, Exp. 10.09., @1.9

KMB will go Ex–DIV on Sep 09, DIV is 1,14.

If I am not mistaken, the P&L will be in any case 0,36.

What I am missing ?
More...

Your mistake #1 is selling the Call ITM. If you know about the dividend and expects that the price will go up, you should've sold the Call OTM or not have sold the call at all so your stock won't be called away to be sold at the strike of $136 denying you all of the dividends and netting you a loss of 38 cents assuming it's going to be called away. If your stock is not called away then you might luck out.

Your mistake #2 is buying the put with too close to the expiration date so you don't have the time value for the put to net you any potential profit if we assume that the stock will go down after ex-dividend. If it doesn't and actually rise as stocks don't always lose their value after ex-dividend, then your entire put cost is a loss.

Basically you sold volatility on the call too cheap with the ITM strike and bought theta too high with the wrong expiration on the put. So in the absolute worst scenario, with the loss from call and the put as per above, you are looking at a loss of (-0.38 X 100) = -38 + (-1.9 X 100) = -190 = $-228 or -2.28 per contract for 100 shares.

The best scenario assuming your stock somehow did not get called away from the short call and the price actually dropped (assuming for the amount of dividend after ex-dividend) for the put, you are looking at a loss of $(1.5 + 1.4 + (1.14-1.9)) X 100 = $-73.1 at expiration
 
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