=== To complicate matters even further; i agree with that last trader, it's getting too complicated ..
Others... It is getting complicated... BUT it's important if you're going to put the trade on, to understand what you own, your obligations and what will happen to your account if certain things happen. Nitro, The $10 you received was premium. You still have to pay for the stock when you get exercised. That's the $10 debit. Since you sold the call, you are forced (on exercise) to buy the stock for $10. If you short at $19 MOC Friday, your broker will cover it for you on Saturday for $10. Shorting MOC should solve your problem.
Yes, thanks for pointing out the "problem" that could occur at expiration. I had not thought of this, but from now on I will be VERY careful to do this kind of analysis on every option spread that I dream up. Got it, but I still made $1 in this case (coupled with the MOC)! swaaaaeeet. nitro
I don't understand this discussion. Why are you bothering the 10 call anyway? Is the stock short restricted? That ten call should for all intents and purposes be considred stock, IV does have a place in this discussion. Also, you shouldn't think of this as a bear call spread, it is buying the 20 put. It is, in essence by buying the 20 call and sell stock(the 10 call), a synthetic long put. You are attempting to do this for even money, or no risk. A very valid strategy by the way, I look for these myself. Hello has a couple of good points, why mess with the bid/ask spread on the 10 call? Second, it could very easily get exercised as MMs, last I heard, don't have short exemption on NYSE stocks and if already short the stock(and are ethical) are supposed to excercise the calls if they sell short on a downtick. The better idea would be to bid for the 20 calls on anticipation of a move higher than sell stock to make the deal a net credit. This takes some skill, but doable. My trade would be to buy some 22.5s and sell the 20s at ratio of 20 to 7. Looking at the chart, i get the feeling it could break out of this one way or another, a backspread seems very appropriate although not sure about Sep. Maybe a ratio diagonal would be better, bid on the OCT 22c and sell the Sep 20 on a pop. The options don't look liquid enough to do this at attractive prices though.
My brain hurts after reading all this..............too confusing this morning..........I'll throw in my 2 cents in a bit. Vega
Nitro, If you can sell (i.e., leg) the 10 - 20 call spread at $10, your risk is zero (except commissions) and you set yourself up for a risk free trade. If the stock falls below $20 (i.e., between $10 and $20) you can sit there and bid for stock if you want to. Just check for dividends and make sure the stock can be borrowed before doing any of these strategies.
Nitro-- I just looked and saw that the sep 20 put is offered at .20 !! If you sell this call spread, the sep 10/20 call spread for $10, then yes, you obviously have nothing to lose (except commissions as you have stated). The risks have been pointed out, early exercise (especially if a dividend is payable before expiration as the MM will exercise THEIR long calls to get long stock and receive dividend), and PIN risk--with the stock right at 20 on expiraiton friday. Since in theory all you are synthetically doing is buying the sep 10/20 put spread, instead of taking a leg on the call spread, you should just buy the Sep 20 put outright for .20 (which is kinda like limiting your loss on taking a leg to 20 cents), and not bother selling the sep 10 put (which you will receive nothing for--I bet if you quote the sep 20 put outright, and also the sep 10/20 put spread, you get the exact same market, so although a drop below 10 is highly unlikey, why take away a potential windfall for no premium? And as Trajan said, you're probably better off just shorting the stock and buying the Sep 20 calls then you are in selling deep in the money sep 10 calls. And by the way, if your in the money SHORT call gets assigned -- you are NOT long stock--you are SHORT stock !! My recommendation is the same as Trajan's, buy the sep 20 call, sell the stock, by being the person long the option, you control when--if ever-- it is exercsed, and if you believe that IV is low, you are long vol and will profit if vol increases. Sorry, guess that was a little more than 2 cents, call it a nickel ! Vega
Actually, there would not be any pin risk at the 20 level since Nitro would be long the 20 strike. Thus, he controls the fate of the 20 calls (whether to exercise or not).
You are correct, I need to learn to put away the crack pipe on work days If the stock is at 20 or around 20, Nitro can play the fun game of exercising his long call, or trying to buy the stock under 20. As an ex-MM, I miss the good ol' days of guessing which of your short ATM strikes will be assigned and trying to guess your position on Monday morning, lol !!!! :eek: Vega