Is My Thinking Right?

Discussion in 'Options' started by Arnie Guitar, Dec 6, 2006.

  1. I've got a Dec Put credit spread position that I entered weeks ago. With a week and a half to go, the short put is at .50 with a great profit. The underlying has moved higher, and I wanted to tighten up the position.

    But then I was thinking, if I sold a put at a higher strike for, let's say, $1, and bought back the lower put for .50, it would be a wash. I'd be better off letting the original short put expire, and save the commish.

    Is my thinking right?
  2. Plus, there'd be the additional margin that I'd be tying up.

    Nevermind, I just answered my own question....

  3. No, if I understand you correctly your thinking is wrong.

    If the stock closes above the new, higher put price your profit would be $1. Before the adjustment your profit would be 50 cents.

    Remember that the original credit you received included the 50 cents still remaining on the original put.

  4. Arnie

    Why don't you look at your delta as an exposure ?

    If you want to increase your (bullish) exposure you'd leg up a Put strike. If you wanted to reduce exposure.... you'd leg down.
  5. Have you forgotten who you're talking to?
    I don't know what Delta is...:( .
    My ignorance of Greeks is the stuff of legends!
    (Delta? That's an airline, right? :p)

    Look, here's what I'm talking about, with fictitious names and numbers.
    Let's say 3 weeks ago, Arnie Guitar Company, symbol AGC :D, was trading at $150/share.
    I sold 10 AGC Dec 130 Puts for $1, and bought 10 AGC Dec 120 Puts for .50.
    Since then, AGC has moved up $10 to $160/share, and the AGC Dec 130 Puts are now .50, and the AGC 120 Puts are .25. I'm confident the stock will stay the same or go higher, and would like to make some more money in options. Let's say the AGC Dec 140 Puts are at $1. If I bought the 10 130's back for .50, and sold 10 140's for $1, it would be a wash(omitting commish), and I'd tie up another $10K of margin capital...I wouldn't have any more money, and I would have reduced my return(ROE).

    I think...:)
  6. It's not a wash. Let's assume you sold the original $130 puts for 50 cents. If you let them expire the profit is 50 cents (you keep the credit).

    Now lets take the roll up to the $140 puts. The profit is: credit of 50 cents(orig $130 sale) + debit .50 (close $130) + credit $1 (short $140 put)= $1 profit.

    Make any sense?

  7. Hi Don,

    But I didn't sell the original $130 puts for .50, in my example I sold them for a buck.

  8. Let's try it this way.

    STO 10 AGC Dec 130 puts @ $1, +$1,000
    BTO 10 AGC Dec 120 Puts @ .5, -$500
    Credit, $500, margin required, $10,000.
    I'm making 500 on 10K

    BTC 10 AGC Dec 130 puts @.5, -500
    STO 10 AGC Dec 140 puts @ $1, $1,000
    I gave back the original $500, and took in $1K,
    I'm still ahead $500.
    margin required, $20,000.

    Now I'm making $500 on 20K instead of 10K.

    That's a losing deal., especially after the vig.
  9. It's official, I've lost my mind.
    Not only do I not know Greeks,
    I don't know math.

    First position,

    Second Position,

    Total income, 1,000...:(

    So it would pay to do it.

    wow. :( :( :(
    I can't believe I screwed that up, oh well...
  10. But you HAVE increased your risk. If you buy back the 130 puts, that profit is booked. That trade is over.

    If you keep the 120 puts you bought for protection and then roll up by selling the 140 puts, this new position has twice the potential risk of the one you just closed. You still might make another 500, but the risk is now double.
    #10     Dec 7, 2006