Wide Bid/Ask Spread Issue

S

spindr0

I own some ratio put protected stock (more long puts than stock). I want to keep the stock and roll my puts down 5 points, lowering my cost basis. However, the spread on the higher strike put is Holland Tunnel wide. I would like to know:

1) Fair value of the June $45 put?

XYZ = $39.15
June 45p is $8.40 x $9.00
June 45c is $$1.65 x $1.80
Ex-div is 3/10 for 71 cents (two dividends by exp)

Based on the midpoint of the $45 call, what is fair value of the $45 put? Can you also show me the calculation?

2) This part is giving me a royal headache. As an alternative, if I place a combo spread order to roll the $45 puts down and MM won't give me the value calculated above (ignoring splitting the B/A on the $40p), I might be able to get around the wide $45p spread by using a long stock collar and transacting with the two options with much narrower spreads?

IOW, the long 45p is equiv to shorting the stock and buying the Jun $45c. So if I sell the covered call and buy Jun $40 puts then I end up with initial shares, new shares, short $45c and long $40p and that's equivalent to rolling the $45p down. Is this correct? I realize that there's more slippage but if I can't roll directly, I still want to execute this. I have no problem tying up the cash, likely unwinding some of this when volatility settles down.

Other suggestions welcome too.

TIA
 
spindr0 said:
1) Fair value of the June $45 put?

XYZ = $39.15
June 45p is $8.40 x $9.00
June 45c is $$1.65 x $1.80
Ex-div is 3/10 for 71 cents (two dividends by exp)

Based on the midpoint of the $45 call, what is fair value of the $45 put? Can you also show me the calculation?
More...


Forget the math. It's all down to .......

spindr0 said:
Other suggestions welcome too.
More...


....... how motivated of a buy/seller you are. If the trade is important then you accept the bid/ask - otherwise you can try the nickel-and-dime approach, which in most cases leads to a higher cost anyways.
 
OptionsOptionsOptions said:
Forget the math. It's all down to .......




....... how motivated of a buy/seller you are. If the trade is important then you accept the bid/ask - otherwise you can try the nickel-and-dime approach, which in most cases leads to a higher cost anyways.
More...
Yap. As I said before: You know what you are doing. :thumbsup:

Those bid/ask are nothing compared to some of the options I traded. It comes down to if you think the reward is >> the price you pay, you go for it. I just paid ask on xx contracts of call options which had a bid of $5.00 and a ask of $7.00. My opinion is even $7.00 is cheap.

Who is right? Only time will tell. Since I paid for theta, time is not on my side but in this case it is my choice to go long instead of put write. :cool:
 
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spindr0 said:
1) Fair value of the June $45 put?

XYZ = $39.15
June 45p is $8.40 x $9.00
June 45c is $$1.65 x $1.80
Ex-div is 3/10 for 71 cents (two dividends by exp)
More...
One thing us mom and pop retails should always look at is who is doing the bid and ask. Usually the mid is not real if one side is a retail like us.
 
2rosy said:
stock - strike = call -put
More...

I think not.

Using your formula and using the midpoint of the call, the put would be worth be worth $7.57 (midpoint).

And yet the put's quote is $8.40 x $9.00 . Houston, I think that we have a problem.

What's missing from your incorrect answer is dividends and carry cost.
 
OptionsOptionsOptions said:
Forget the math. It's all down to .......




....... how motivated of a buy/seller you are. If the trade is important then you accept the bid/ask - otherwise you can try the nickel-and-dime approach, which in most cases leads to a higher cost anyways.
More...

At one point on Friday, the B/A spread was $1.20. I'm not motivated to trade at such prices, particularly when the aggregate position is fairly delta neutral hedged and a move in either direction doesn't slam me.
 
spindr0 said:
I own some ratio put protected stock (more long puts than stock). I want to keep the stock and roll my puts down 5 points, lowering my cost basis. However, the spread on the higher strike put is Holland Tunnel wide. I would like to know:

1) Fair value of the June $45 put?

XYZ = $39.15
June 45p is $8.40 x $9.00
June 45c is $$1.65 x $1.80
Ex-div is 3/10 for 71 cents (two dividends by exp)

Based on the midpoint of the $45 call, what is fair value of the $45 put? Can you also show me the calculation?

2) This part is giving me a royal headache. As an alternative, if I place a combo spread order to roll the $45 puts down and MM won't give me the value calculated above (ignoring splitting the B/A on the $40p), I might be able to get around the wide $45p spread by using a long stock collar and transacting with the two options with much narrower spreads?

IOW, the long 45p is equiv to shorting the stock and buying the Jun $45c. So if I sell the covered call and buy Jun $40 puts then I end up with initial shares, new shares, short $45c and long $40p and that's equivalent to rolling the $45p down. Is this correct? I realize that there's more slippage but if I can't roll directly, I still want to execute this. I have no problem tying up the cash, likely unwinding some of this when volatility settles down.

Other suggestions welcome too.

TIA
More...
Hi spindr0
I just put an analysis up on our blog looking at this question: https://blog.orats.com/traders-complain-about-options-market-width-here-are-the-worst-offenders
We also have a way to look at theoretical values to help with your trading.
https://blog.orats.com/hs-search-results?term=theoretical+&type=BLOG_POST&id=6125614442
Let me know if you would like me to expand on these.
Best
Matt
 
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