Bull SpreadSpread on RIG

Discussion in 'Options' started by stoic, Apr 11, 2010.

  1. stoic

    stoic

    May Options Bid/Ask Prices from 04/09/10
     
    • rig.jpg
      File size:
      384.3 KB
      Views:
      113
  2. Do you think this position would be supported by CVX's bullish guidance on friday? or is RIG a different animal?
     
  3. stoic

    stoic

    According to the headlines "Chevron is making a big push in the Gulf of Mexico" with a high-tech drillship to find oil 6 miles below and costing $1 million per day. The rig called the Discoverer Inspiration is owned by drilling contractor Transocean LTD (RIG). However I have made many plays on RIG in the past, it just happens to be one of the stocks I'm very familiar with and look to for short term option opportunities.
     
  4. What's does the big graph on the right have to do with anything?

    The word HELP in capital red letters on the bottom right over the profit numbers should be way to the left over the -12.50% column with a lot of exclamation marks. :)

    On a more serious note, with a more than 3:1 max risk/reward ratio, I'd buy more 75p's with any sign of weakness. 5 more for 2.5-3 pts would cut the ratio by 1/3 right now and 4 weeks from now you'd still be better off than without (assuming RIG was in the low 70's sour spot).

    But if you're bullish, you're bullish and add'l puts would be a waste of money.


    On another note, does anyone know of a source for an Excel sheet that will iterate IV for a string of option prices? Well actaully for one price since I'd adapt the spreadsheet for multiple quotes. TIA.
     
  5. stoic

    stoic

    I don't know of a spreadsheet that does exactly what you want. But I could make one easily.
     
  6. my history with . RIG for a period of 14 months. I did covered calls and made a tidy sum with RIG..then OCT 2008 came.. it was 115.. i did a 85 to 100 put spread.. .(lost 4500-premium).=3800.. darn thing went to under 50... the spread saved me..

    so in essence it took back 90% of the money I had made from the prev 13 months..

    its like climbing a steep stairs. u seem like u make progress month of over. month.. then u come sliding down!
     
  7. charts

    charts

    What are your expectations for the underlying's price and implied volatility over the time frame you intend to open your position? What has to happen to close your position for profit? To close it for a loss? To adjust it? ... :)
     
  8. I forgot to mention, why not just do the synthetic 75/85 call spread and save 1/2 the commissions, a pile of slippage and have a simplified combo order available for entry and exit?
     
  9. stoic

    stoic

    My expectations for the underlying is for it to trade above 85. The credit put side expires worthless and both calls are ITM and maximum profit is achieved. The Historical Volatility for RIG is: 2 month 10.72%, 3 month 14.37%, 6 month 20.97%, 9 month 26.79%, 12 month 34.00%.
    The Implied Volatility on the options:
    85 calls 28.72%
    80 calls 31.51%
    80 Puts 30.41%
    75 Puts 33.05%

    I really don't care what the IV does during the life of the options. As long as the underlying remains above 85. If RIG hits the breakeven point or hits 80, depending on how much time remains and other market conditions, I would have to reevaluate and possibly exit the position in full.
     
  10. stoic

    stoic

    A synthetic call involves Long Stock & Long Put, so I'll assume you meant Synthetic Long, Long Calls and short Puts. Using the 85 calls and the 75 put would be a Synthetic Long with split strikes.

    Using the same prices this position would have a breakeven point of 88.13 compared to 82.62.

    A net principal of ($3,130.00) and the naked puts have a margin requirement of $8,020.00 total initial outlay of $11,150.00, and the uncovered option requirement is marked-to-market daily , this requirement could increase significantly should the underlying move against the position. True the synthetic has unlimited upside but this includes a significant downside.

    So, the Bull Spread Spread has limited risk, requires less capital and the underlying has to decline about 3 points to breakeven, if its unchanged, or up, maximum profit achieved.

    The Synthetic while having unlimited profit potential also has significant downside risk. Requires greater capital, and requires the underlying to increase just to breakeven, requires a price of 90.50 to realize the same profit dollar wise, and a price of 91.61 to reap the same profit percentage wise (assuming the stock never declines and increases the capital requirement for naked margin).

    There was no slippage, all orders are at the natural. The extra $35 in commissions generated from the other two legs is a bargain.
     
    #10     Apr 12, 2010