To all stock/options investment gurus,
Security: Ebay
Current Price: 33.69
Assumption – Till Jan08 price will be in between 0.7 * 33.69 as well as 2 * 33.69
Leg1 – Collar(call sp,call prem,put sp,put prem)=(1750, 1700, 1750, 20)
Leg2 – VerticalcallSpread(bcall sp,bcall prem,scallsp ,scallp prem)=(5500, 25, 4000, 215)
Leg 3 – VerticalputSpread(bputsp,bputprem,sput sp,sput prem)=(4000, 730, 5500, 2120)
Table of earnings is as follows:
Initial Investment: 108
ProjectedPrice,MoneyIn,Gains,GainsPerc
twenty 250 142 (131.4814814814815)
twenty-two 250 142 (131.4814814814815)
twenty-four 250 142 (131.4814814814815)
twenty-seven 250 142 (131.4814814814815)
twenty-nine 250 142 (131.4814814814815)
31 250 142 (131.4814814814815)
34 250 142 (131.4814814814815)
Same compartment price = 69.
What is wrong? Commissions have been not considered.
Well…
Collar = buy security, sell call, buy put
VerticalcallSpread = buy call, sell call
VerticalputSpread = buy put, sell put
Legs of traffic are:
Leg1 – Collar(call sp,call prem,put sp,put prem)=(1750, 1700, 1750, 20)
Leg2 – VerticalcallSpread(bcall sp,bcall prem,scallsp ,scallp prem)=(5500, 25, 4000, 215)
Leg 3 – VerticalputSpread(bputsp,bputprem,sput sp,sput prem)=(4000, 730, 5500, 2120)
sp = set upon price for the option
prem = reward for the option
so, bputsp = Buy Put’s Strike Price
sputsp = Sell Put’s Strike Price
Is there any alternative specific info. which we need ?
Leg1 – Collar(call sp,call prem,put sp,put prem)=(1750, 1700, 1750, 20)
This means:
Buy 100 shares
Sell 1 Call of set upon price 17.5 with the reward of 17.0 (Total Price = 1700 = seventeen * 100)
Buy 1 Put of set upon price 17.5 with reward of 0.20 (Total Price = $20 = 0.20 * 100)
Zman, Thanks.
Well.. I determine which Leg1 is apart than Leg2 + Leg3, though afterwards I am regulating the collateral generated by Leg2 + Leg3 to financial Leg1. Hence I clubbed them together. But the single can leave Leg1 out.
Also, I determine with we about the American character of options. Here is the shot during the analysis.
There have been 3 engaging regions of price line.
R1 : price <= 40
R2 : 40 < price < 55
R3: 55 <= price
In R1 as well as R3, I am stable by my widespread positions (i.e. my guilt is 1500)
R2 is wily as it leaves the sole call as well as sole put in the money. Lets contend I get the reserved upon both of these options as well as lets contend which the price is $50.
Exercise upon put @55:
So I buy during 55 as well as sell during 50 (market): Net -5
Exercise upon call @40:
So I buy during 50 (market) as well as sell during 40: Net -10
So, during no indicate my guilt is some-more than -15
Now the wily partial is to investigate the box where usually sole put gets reserved as well as not the sole call.
In which case, I tighten the sole call position. (Cont’d)
cont’d from the prior one:
Now the sole call (being in money) will hopefully traffic linearly with the price of the underlying confidence (and price of the sole put, which is additionally in money).
What contend you? I would unequivocally conclude your opinion.
Thanks the lot again!
Hi Zman,
Your research is utterly right. You had said:
Long 1 $55 call @ $0.25 = $25
Long 1 $40 put @ $7.00 = $700
Long 100 shares @ ($55 – $21) = $3,400
Total price = $4,125.
If we finish up sportive your prolonged put, your lapse will be $4,000, for the detriment of $125.
Well, the detriment is since the unique worth of my prolonged put choice is being eaten divided by my practice of the put option. I would do the most appropriate of
1. Sell the put + Sell the batch OR
2. Exercise the put
In your analysis, if the arrogance is which all else stays the same, afterwards I consider #1 will furnish improved price than #2.
My idea is to distinction from the ebbing time worth of the options but incurring any risk.
Thanks for your analysis. It has been intensely helpful!
{ 4 comments… read them below or add one }
I would but it’s too tough to figure out all the way you’ve noted all these trades. Put it in plain language and I’ll take a look.
Many companys post inflated projected gains.
When they fail to meet them, the price plunges.
Like any other stock, price can go up or down.
Thanks for clarifying.
You really have two spreads. What you cave called “leg 1″ in really a conversion.
Since quotes change while the market is open, I’ll do the math using Friday’s closing quotes, the bid for sales and the ask for buys.
Buy 100 shares @ $33.99 = $3,399
Sell 1 $17.50 call @ $17.30 = $1,730
Buy 1 $17.50 put @ $0.20 = $20
Total cost = $1,689.
Value of spread at expiration = $1,750
Total profit = $61 = 3.6% of cost.
You would make more buying a CD.
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What you are calling legs 2 and 3 is actually a box spread.
Buy 1 $55 call @ $0.25 = $25
Sell 1 $40 call @2.30 = $230
Buy 1 $40 put @ $7.00 = $700
Sell 1 $55 put @ $21.00 = $2,100
Total Credit = $1,605
This looks good since at expiration it would only cost you $1,500 to close the spread. As the old saying goes, if it looks to good to be true …
The problem is that options on stocks are American style, meaning that the can be exercised any time before expiration. In this case, it is fairly safe to assume that you would be assigned the $55 put shortly after you sold it.
Any time you sell a put for less than its intrinsic value, you are giving a the buyer a risk-free profit.
——
Conversions and box spreads are are arbitrage positions. You will never find one that earns more than the “risk free” interest rate.
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——————-
If the short put is not assigned early you have a winning position since you will have been paid $1,605 for something you that will will close for $1,500 at expiration. (You noted it would never be more than $1,500 which is true, but it is also true it will never be less than $1,500.) Your profit will be $105 plus 10 months interest on $1,605.
However, since you can be fairly sure of being assigned early, the picture changes as follows:
Credit from opening the spread: $1,605
Cost of buying the stock at $55: $5,500
Cost to cover the short call: Unknown
If we make the highly dubious assumption that your cost to close the call is the same as what you paid for it ($230) you will be left with
Long 1 $55 call @ $0.25 = $25
Long 1 $40 put @ $7.00 = $700
Long 100 shares @ ($55 – $21) = $3,400
Total cost = $4,125.
If you end up exercising your long put, your return will be $4,000, for a loss of $125.
It is also worth noting that the combination of a long $40 put and a long stock position is equivalent to a long $40 call. As of Friday’s close that call’s ask quote was $2.35. So, an equivalent position wourld be
Long 1 $55 call @ $0.25 = $25
Long 1 $40 call @ $2.35 = $235
Total cost = $260
While it is true if these options expired worthless you would lose $260 instead of $175, the fact that you would earn more than $85 interest on the extra $3,865 in your account makes that a better choice. The fact that you would have fewer commissions further enhances the benefit.
Your trade seems to be ok since you are financing you have a self financing strategy and a strange stock to play with which moves up from less than 20 to assumed 60 and above in short time. Superficially it looks OK.