IndexTrader wrote: So your intent would be to repeat this process over & over? Yes, because it lowers your breakeven so far for only .25 more risk. Usually what happens after the stock makes a move in such situations is that at least 1 or both of those options could only be liquidated for less than you had assumed. (Not exactly a very liquid marketplace and VERY opportunistic). This is theory, not hard numbers, but very doable. No one knows where a stocks price will go, playing for position. Not interested in liquidating the 25 put, anything lower than 25 would exercise,same with the 30, because the total risk was 1.50, now 1.75 and the breakeven is lower by almost $5, or if the risk was favorable do the same thing again at 21/22(sell the 25, buy the 20)if you are only giving up .25 more risk.
Patefern. Check the prices on the example you used about the 30p trading at 1.5 when stock is at 30. That means you bought the call synthetically at 1.5. In your example of stock going to 26, and the put trading at 5.25 the 30 call would be worth 1.25 which is highly unlikely. this means that your 50 delta call only went down 25 centswith XYZ going down $4 !
GATrader: There were 2 examples on this thread: If you are long ABC stock at 30 and long a 30 put for 1 1/2 and the stock goes to 26, and the 30 put is now 5 1/4 and the 25 put is 1/2, what would you suggest doing? An example would be XYZ trading at 35, put on a vertical bear call spread, selling the 35 and buying the 40 with 3 weeks to expiration. With 10 days to expiration XYZ is at 38. If you are talking about ABC stock, I agree the call can't be worth 1.25, however with ABC I'm not trading calls but long stock and 30 put which I roll down and didn't mention any calls. Am I still missing something?
With ABC at 26 and put at 5.25 the call should be worth around 1.25 due to conversion/reversal arbitrage. Put is intrinsically worth 4 which means time value is at 1.25 which means calls should have TV of the same unless there are dividend issues.
I understand what you mean now. Doubtful the call would be 1.25. The example was to point out theory and I used convenient numbers to explain it. Thanks for the explanation.