I posted this to the NRG futures forum, but figured a thread in the options thread might garner more feed back, Just a random thought.... CLQ1 settled 113.02 In August crude options, two short put trades. One a OTM naked put, the other a closer to the money short put spread/ For the moment shelve a view on short term direction, but for the purposes of this post we are obviously bullish. What is the difference between the following trades aside for the net credit differences (More on the spread if it can be executed), the spread obviously is closer to the money & the naked put farther OTM. But, The delta profile of each position is almost identical @ -.10. Will the P&L of each behave the same as the market trades, will the spread swing around more, or will they move identical? Short CLQ1 92.00P for .55 credit (roughly) Delta -.105 Gamma .010 Theta -3 Vega 12 versus Short CLQ1 112.00P for 5.30 credit (roughly) Delta -.485 Gamma .029 Theta -4 Vega 21 Long CLQ1 108.50P for debit of -4.50 (roughly) Delta -.384 Gamma .027 Theta -4 Vega 21 Do they trade the same? or is the net position on the spread more volatile or no difference? Greek info was cut & pasted off of futuresource.com just for example purposes.http://futuresource.quote.com/quote...l=CL+Q1&view=GREEKS&range=both&expiration=ONE
1) Each position is "neutral-bullish". 2) The short-put will respond more to volatility and time decay as long as it remains decently out-of-the-money. If CLQ declines into the mid-90's, the delta will have much more impact from the option becoming closer to "at-the-money". 3) The put-spread ought to be more stable because of the relative offset of vega and delta on the spread pair. Closer to expiration, the spread can become more volatile if the market is "close" to $112 as the 112-put's delta and gamma will be more sensitive. 4) It also illustrates the steepness of the skew in volatile markets whereby the decline in premium to the out-of-the-money strike is very "little". You're paying "a lot" for the 108.5-put compared to what you get from short-selling the 112-put.
Whether it's a cost of carry or option greeks question... You are the man, Good Sir. Thanks for the response. Best, J-Law
You can see the performance of each over time by modeling the respective positions. You can also get a "right now" snapshot (no time decay or change in IV) of what will happen if price moved by looking at other strikes. For example, you are comparing the 92p to a 112/108.5p spread. Look at the price and Greeks of the 97p vs the 117/113.5p spread. These would be the today values if price moved down 5 pts. 10 pts down would be the 102p vs the 122/118.5p. Either way, these would depict what the "man" said