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kjones5159
Registered: Aug 2012
Posts: 134 |
09-23-12 05:45 PM
]I'm talking about a bull CALL spread, no puts involved, with a basis of holding until expiration.
Buy ITM call, sell OTM call, a debit spread that starts in the green. I'd be buying the $38 contract ITM, thereby giving me rights to buy stock at $38, and since ITM are priced so that you'd break even (or be very close to it) if buying and exercising it at any one point in time, my thinking is to shave some cost off of it by selling an OTM call.
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Put_Master
Registered: May 2009
Posts: 1029 |
09-23-12 07:18 PM
Quote from kjones5159:
I'm talking about a bull CALL spread, no puts involved, with a basis of holding until expiration.
Buy ITM call, sell OTM call, a debit spread that starts in the green. I'd be buying the $38 contract ITM, thereby giving me rights to buy stock at $38, and since ITM are priced so that you'd break even (or be very close to it) if buying and exercising it at any one point in time, my thinking is to shave some cost off of it by selling an OTM call. No risk of assignment.
In my example of a $40,000 account, you may have the theoretical right to buy the stock at $38, but you do NOT have the funds to do so.
Just as in the selling of a put, you would need $380,000 to buy the 100 contracts. Thus, you would need to close the trade before the contract expired, when the stock traded between $38 and $42.
The higher it traded when you closed it, the higher your profit. Up to your pre set max gain.
So it really doesn't matter if you initiated the bullish spread trade via puts or calls.
Either way, (bullish put or bullish call spread), you can NOT buy and own the stock per my $40,000 account example.
Either way, if you are using your entire $40,000 account, then you are using massive margin leverage of around 10:1. Thus you can not buy the stock.
If you are only selling/buying up to 10 contracts, that is a different issue.
But that means you would only be using 10% of your account funds.
If you use all your funds for spread trades, you can NOT buy 90% or more of the stock(s) you are investing in.
You MUST close the trade before exp.
If you used a lot more than 10% of your account funds and don't close your call spread trade, your broker will do it for you on exp day.
HOWEVER, if the company is too busy to get to your account, you will have to HOPE the stock does not open monday morning trading down, or not only will your account be potentially 100% wiped out,.... but you may actually owe the company money a well.
Thus, the trade must be closed, unless you have the funds to buy all your contracts.
In the case of JPM, you need $3,800 for every single contract you initiated, for every contract you want to buy.
If you sold 100 contracts with your $40,000 account, you would need $380,000 to buy all your call spreads at $38.
And keep in mind, you would have already paid cash up front, to initiate the bullish call spread trade.
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Put_Master
Registered: May 2009
Posts: 1029 |
09-23-12 08:38 PM
<<< Prob JPM below 38 = 65% ; P/L = -$251
Prob JPM Greater then 42 = 8% ; P/L = $149
Prob between 38 and 42 = 1 - (.65+ .8) = 27% ; P/L = -51 (average)Probability wise a bad bet... unless you have information that the future for JPM is bullish. I don't get that from the chart: >>>
Oldnemesis, we are in agreement the JPM potential trade is a low probabiligty one.
However, we differ on why.
You are basing it on a one size fits all, generic prob calculator formula. I'm basing it on common sense.
The problem I have with these generic probability calculators is, they don't take issues such as tech support into account.
For example, whether JPM is trading at it's all time high, or trading at strong tech support, or whether the strike being discussed was at strong tech support,... is all irrelevent according to the formula.
Either way, the probability % answer the calculator spits out will be the same.
However, in the real world, if a stock is currently trading at L-T tech support, and the desired otm strike is at an even lower L-T tech support area,.... that trade will have a higher prob of remaining otm, than a stock not currently trading at tech support, and with no tech support seen any where close to the desired strike.
And yet, the prob calc will evaluate both trades as being equally likely to be successful.
Tech support is 100% irrelevant to all probability calculators.
For that and other reasons, I totally ignore all those one size fits all generic probability calculators.
I prefer to use other criteria, such as common sense and experience, to evaluate a trades likelihood of being successful.
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kjones5159
Registered: Aug 2012
Posts: 134 |
09-23-12 08:48 PM
I was under the impression that I would exercise the option and "buy" the shares, but simultaneously sell them at the market/higher strike (for a spread) instead of taking posession of the shares outright. Point here being that if the sold option expires worthless, the profit of the trade is the premium recieved subtracted from the intrinsic value of the ITM option, for this to happen the spread is held until expiration so as not to be naked. Anyway, I've pretty much answered my own question.
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Put_Master
Registered: May 2009
Posts: 1029 |
09-23-12 09:22 PM
Quote from kjones5159:
I was under the impression that I would exercise the option and "buy" the shares, but simultaneously sell them at the market/higher strike (for a spread) instead of taking posession of the shares outright. Point here being that if the sold option expires worthless, the profit of the trade is the premium recieved subtracted from the intrinsic value of the ITM option, for this to happen the spread is held until expiration so as not to be naked. Anyway, I've pretty much answered my own question.
I'll let others answer the question, as I'm more used to thinking in terms of puts vs calls, and i don't want to mislead you.
But it is my understanding that whether or not you have a profit will depend on where the stock is trading at the time you close the trade.
You may have have a total, a partial, or no profit at all.
Didn't you pay money up front to initiate the trade?
Also, you talked about the trade giving you the right to buy the stock at $38.
That's why I assumed you wanted to be able to consider doing so as an option (choice).
Hence, my point being you can NOT buy the shares, since you don't have enough cash in the account, So you must close the trade before exp, and hope you are closing for a profit.... which will depend on where the stock is trading.
Yes, you can simultaneously buy and sell the shares when exercising the option. Assuming the contract has not expired.
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Put_Master
Registered: May 2009
Posts: 1029 |
09-23-12 10:57 PM
Bottom line,... whether one wants to initiate a bullish put spread or a bullish call spread, there is really no advantage of selecting one over the other.
Just depends on which structure you prefer to deal with.
Both will have the same cash at risk, both will have the same income generating opportunities, both will have the same risk/reward, both will have the same probability of being successful, ect.....
There may be times one style is easier to get a fill on than the other. But for the most part, it boils down to a preference of which way you are more comfortable, in terms of thinking about the trade.
I'm more used to selliing put spreads, and thinking about spreads in that "context", while others may be more used to thinking about spreads in the "context" of calls.
Just a personal preference.
No advantage/disadvantage to trading one way vs the other.
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