I was playing for 0.45 in a month on about $3.75 worth of margin. The strikes were 15/40, and my broker, Optionshouse charges essentially 15% extra margin on a box spread. So, $25/share x %15 = $3.75 margin, with me receiving $25.45 per share. Basically, I was expecting to just cash in the 0.45 in a month for better than 10% return on the margin.
The May 40-synthetic is 2.00 under the natural. I assume that it became HTB just very recently? The carry on these can double or triple in a year. I am not here, we are not having this conversation.
Word. I know all this, but it certainly helps to be reminded. I guess my question had better be rephrased: I am currently in a position which will gain ~$2.95/share, if I can hold it until May expiry. Problem is, holding it eats up all my margin, and if the short call early exercises, I am completely f----d as a result, with a $2.50 loss being locked in. So, any suggestions on how to mitigate that risk so I can turn my current $2.50 loss into a $0.45 gain? This is a total noob mistake because if I had had the right size, then I could've used margin to delta hedge the move and not be in this predicament.
Thanks atticus. It was hard to borrow initially, but apparently that has blown out like crazy and I didn't realize the risks. The main problem is size. I can't even get into the May 40-synthetic to delta hedge without capitalizing some of the loss as all my margin is used up. Like I said, noob mistake on size. All - do you think it's good advice to capitalize some of the loss in order to delta hedge with the synthetic? I feel here like I shouldn't be trusting the deltas because of the borrow.
Delta hedge a change in borrow? The position is directionally-agnostic. The problem is that the synthetics "dropped". Look at the price of the 40-strike May synthetic.
Right. So what on earth do I do? Am I forced to lock in the whole trade at a loss? I am trying to figure out how to limit the downside of waiting (i.e., early exercise risk on my short calls) but still retain some upside if I can make it to expiry? Is this just foolish? It's not that getting exercised is any worse than the current position, it's that if the underlying moves up further, then I fear becoming exponentially f--d by the position.
Yeah, it's too late to do anything unless some shares materialize. I feel for you, Brother. Years ago, I had a similar scenario in a large TASR box. The 15s are going to be a problem. Trading the synth is ok, but my guess is that it won't drop further. It's at a <$2 discount as of the close.
You can't do anything about the 15s and any further rally isn't going to impact the ex/assignment. When the stuff goes discount (15-strike) you'll get assigned. It's probably there already. You need to stick with five and ten-wides on these sort of things to withstand the var on the borrow. It's like trading boxes on SPX with rates going from 5 to 80%. Selling the synth isn't a good bet here. It's an implied rate of >60%.