Hi all, In the thread "My strategy to earn money with no risk" there is an equation which translates to: risk = current price (ask) - strike price + put price (ask) http://www.elitetrader.com/vb/showthread.php?postid=1138952 My question is, is the price of the put per share or per contract? For example I am considering a covered put on NGPS. $45.03 x 200 shares + $20 commission = $9026 $2.45 x 200 shares (Sept 15 with $45 strike) + $15.50 = $525.50 Is that right? risk = $45.03 - $45 + $2.45 = $2.48 per share Including commission: risk = $9026 - $8990 + $525.50 / 200 = $2.81 per share (roughly) So I would guess that to make a profit I need NGPS to either go up $2.81 (+6.2%) or go down $2.81 (-6.2%), before the option expires September 15th. Yay? Nay? Or around this time would the best strategy be to wait for the October options to be released? (If I'm not mistaken, options expire this Friday, so new options must be created on Monday, I'm thinking.) Let me know if I'm missing any hidden fees above. This whole "per share" and "per contract" pricing is confusing to me, plus it looks like there might be a fee for trading on margin? Or since the put is covered, there is no margin? ??? Thanks in advance, Stoxtrader
The prices are per put not per contract as 1 contract represents 100 shares. In order for you to make a profit the stock has to go up, if the stock goes down you lose money. It's a synthetic call - you make money if the stock goes above your breakeven at expiration and you lose money if it stays below it. Oh yeah, if you buy the stock on margin (50%) then you also pay margin interest, i.e. cost of carry. There's no margin on put as you're buying a put not selling it.
Hi stoxtrader To add to mte's answer. Your formula is correct but you need to know what values to plug in. Once you know your risk then you know your breakeven. So if your risk is 2.45 then your breakeven will be: long strike plus risk i.e. 45+2.45. You can reduce your risk a little by selling a call and turning the position from a married put (aka long call) into a collar (aka synthetic bull call spread). There's a very good book devoted to this topic at randomwalktrading.com. Best daddy's boy
No, you're long a synthetic call which is equivalent to buying the natural Sep 45C. You lose the price of the call on a close <$45 at expiration. It's fine to strucure the trade synthetically if you're long the stock, but silly to do so if you're starting flat on the ticker. You would need to trade 4 puts to allow for PnL symmetry. The trade would produce a long synthetic straddle.
Hi Eliot I've read the book a number of times and yes, the strategy has worked for me so far on the trades I have placed (only 6 ), keeping in mind I placed some of them for a credit and either kept the credit or made more. The ones I placed for a small debit made a good profit or expired for the debit. However, I am still in the early stages with learning this strategy. It looks deceptively simple at first but there are a lot of nuances involved that take a while to understand. For instance, strike price selection. I'm also working on implementing the other book's strategy (collars) and I'm on the learning curve of dynamic hedging - wish I had riskarb's grasp of options - but hopefully one day will be able to master it Best daddy's boy
There's quite a number of us over at Yahoo groups talking about how this strategy works. Search for broken wing butterfly or "BWB".
titile of this thread is "Newbie Question: Married Puts aka Covered Puts" married puts are not the same as covered puts. what are you saying?
The above is correct according to 888options.com (see definitions below). However, according to The Bible of Options Strategies a covered put is also known as a married put. Originally I was looking for limited risk, so going by the definitions at 888options.com this would be the married put. After looking at the responses, it would appear a straddle or strangle might be what I am actually looking for... Married put strategy The simultaneous purchase of stock and put options representing an equivalent number of shares. This is a limited risk strategy during the life of the puts because the stock can always be sold for at least the strike price of the purchased puts. Covered option An open short option position that is fully offset by a corresponding stock or option position. That is, a covered call could be offset by long stock or a long call, while a covered put could be offset by a long put or a short stock position. This insures that if the owner of the option exercises, the writer of the option will not have a problem fulfilling the delivery requirements.