Where is my mistake?

newwurldmn · Aug 29, 2021

OptionsOptionsOptions said:
TYPO?

138 should be 136
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not a typo.

learn some options theory.

OptionsOptionsOptions · Aug 29, 2021

newwurldmn said:
not a typo.

learn some options theory.
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This is what these forums are for.

taowave · Aug 29, 2021

As long as he understands the bet he is taking,it's not a big deal.

Trading an OTM conversion with less risk of being assigned will be priced accordingly.No free lunch.

I don't love the bet as vol is so cheap.If he gets assigned,the residual put will be cheap..

My guess is the risk reward is 1:1

JSOP said:
Your mistake #1 is selling the Call ITM. If you know about the dividend and expects that the price will go up, you should've sold the Call OTM or not have sold the call at all so your stock won't be called away to be sold at the strike of $136 denying you all of the dividends and netting you a loss of 38 cents assuming it's going to be called away. If your stock is not called away then you might luck out.

Your mistake #2 is buying the put with too close to the expiration date so you don't have the time value for the put to net you any potential profit if we assume that the stock will go down after ex-dividend. If it doesn't and actually rise as stocks don't always lose their value after ex-dividend, then your entire put cost is a loss.

Basically you sold volatility on the call too cheap with the ITM strike and bought theta too high with the wrong expiration on the put. So in the absolute worst scenario, with the loss from call and the put as per above, you are looking at a loss of (-0.38 X 100) = -38 + (-1.9 X 100) = -190 = $-228 or -2.28 per contract for 100 shares.

The best scenario assuming your stock somehow did not get called away from the short call and the price actually dropped (assuming for the amount of dividend after ex-dividend) for the put, you are looking at a loss of $(1.5 + 1.4 + (1.14-1.9)) X 100 = $-73.1 at expiration
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JSOP · Aug 29, 2021

During the interim before expiration, if the price drops below the strike of the put more than the price of the call then you might get a +ve profit on the put and the call. If you think the price is going to be going up for the dividend, you might want to buy back the call in addition to selling the put but the problem with that is that the price of the stock will also be dropping and if the price of the stock drops further you won't have the put there to protect you so you will have to sell the stock at the loss at the same time when selling the put hoping that the profit on the put is larger than the loss on the stock or you can risk it with the stock to see if the price will rise later for the stock to appreciate.

JSOP · Aug 29, 2021

JSOP said:
Basically you sold volatility on the call too cheap with the ITM strike and bought theta too high with the wrong expiration on the put. So in the absolute worst scenario, with the loss from call and the put as per above, you are looking at a loss of (-0.38 X 100) = -38 + (-1.9 X 100) = -190 = $-228 or -2.28 per contract for 100 shares.
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Edit: Sorry I forgot to add the premium of the Call that you shorted. So your loss will be reduced to -2.28 + 1.5 = $- 0.78 in this worst scenario.

taowave · Aug 29, 2021

You are really complicating this.
He's got a small embedded short Delta. Should the stock drop,the conversion will go his way with limited profit. Why lift the entire short leg ?? Totally different bet

JSOP said:
During the interim before expiration, if the price drops below the strike of the put more than the price of the call then you might get a +ve profit on the put and the call. If you think the price is going to be going up for the dividend, you might want to buy back the call in addition to selling the put but the problem with that is that the price of the stock will also be dropping and if the price of the stock drops further you won't have the put there to protect you so you will have to sell the stock at the loss at the same time when selling the put hoping that the profit on the put is larger than the loss on the stock or you can risk it with the stock to see if the price will rise later for the stock to appreciate.
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JSOP · Aug 29, 2021

taowave said:
You are really complicating this.
He's got a small embedded short Delta. Should the stock drop,the conversion will go his way with limited profit. Why lift the entire short leg ?? Totally different bet
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To avoid the whipsaws. If the stock later on goes up close to the expiration with the short assigned (with the stock coming up it's very likely) after the stock has already been sold then he's short naked, an even worse situation imo.

taowave · Aug 29, 2021

Max loss if assigned is .78 minus whatever the long put sells for. What whipsaws are you talking about???

JSOP · Aug 30, 2021

taowave said:
Max loss if assigned is .78 minus whatever the long put sells for. What whipsaws are you talking about???
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Ok I forgot the OP is long in the stock.

Ok I was right then. The two mistakes are too low of call strike which increased the prob. of the assignment and too close of the expiration date of the put.

Anyway...

jonfos · Sep 5, 2021

you are guaranteed to sell your stock at $136 which you brought at $126.38 loss 38 cents o enter that position your premiums gained were a loss of 40 cents but the dividend of $1.14 means yes you make 36 cents per stock or 0.3% over the period not great but at least its risk free.