Hi all, Need a bit of help before I get myself in too much trouble.I am looking at the SPY options,and just started trading the 1 day calendars,i.e the options going out on Friday vs the following Monday. I am assuming/hoping that they both "settle" at the same time.By that I mean a 4:00 PM close. I just traded the SPY 6/15 vs the 6/18 - 279 Call Calendar for .02... If the SPY settles below 279 on 6/15,I will be long a 1 day call for .02,and I am assuming if SPY settles above 279 on 6/15 and I sell SPY against the remaining 6/18 calls,I will be long a synthetic put for .02... Is my risk not selling SPY shares at the settlement price on 6/15 expiration?? Is there a way to insure selling the SPY on the close to get the settlement price? Not concerned if the index is below 279 as i own a call for .02..I am a little shaky on the mechanics of hedging on 6/15 expiry if the index is above 279.. Hope i was clear and thanks in advance!!
There's nothing to hedge here....the 6/18 is the hedge for the 6/15. Worst case scenario is it goes deep in the money and you get assigned--and hold your 6/18 call that you could use to purchase the shares if it doesn't have any time value left.
Its not cash settled, if SPY ends up above 279, you will be assigned on your short call and get short stock. You will then have the 6/18 calls vs short stock, which makes you synthetically long the 6/18 279 put. What is your risk? You need to have enough capital to hold the short stock if you are assigned. Also it is possible you wont be assigned even if the index is above 279 (or will be if below 279) based on after hours moves on Friday. So nothing really to hedge. Of course you could get out of the position before expiration as well.
Thanks for the help...So I will either have a 1 day call or a one day synthetic put for .02...seems awfully cheap
SPY is NOT cash-settled; it's physical delivery. SPX is cash-settled. I used to think SPY is cash-settled too until my broker corrected me. And what you did is NOT a synthetic put. It's what's called a credit spread, a calendar credit spread in your case. And everybody is right. You are already hedged with the long & short call. The only thing you need to watch out for is the assignment on your short call.
His position will become a synthetic put if he is assigned on his short call. He bought the calendar, for a debit. It is not a credit spread.
Thanks all....I am used to trading the SPX and naively assumed the index was cash settled after buying the spread,and was concerned with hedging the short option if exercised. One less thing to worry about..With that said,I should probably know the timing of dividends as well..