WIDE bid ask SPREAD, can I neutralize this for no loss?

Discussion in 'Options' started by cqm, Jan 20, 2012.

  1. cqm


    Hello, I was doing a delta neutral strategy using deep in the money covered calls, well it was supposed to be delta neutral

    I opened it to completely protect me from all stock moves (up or down) temporarily. I am not collecting premium from this trade.

    anyway, lets say XYZ is trading at 100 (delta 1.00 because it is stock)
    and I sold XYZ 75 Call (delta -1.00 because it is short ITM call)

    the bid and ask on the 75 call was 10% apart, and I totally caved to the specialist on this one and got in close to the bid side.

    so because my broker shows me profit/loss based on the theoretical price of the option (and/or its midpoint between bid and ask), my account shows an instant loss. its like a 6% paperloss.

    now, my problem is that I already know I won't be able to exit this position on a favorable side of the bid/ask, no matter what the stock does.

    so instead of buying to close the short calls, can I just exercise the contracts and close the position for NO loss? the idea is that the short shares will neutralize the long shares (as they will be equivalents)

    **there is no premium left in these short calls, so I won't be missing out on theta if I exercise**

    my logic here is that the theoretical price shows the paper loss

    but as long as I have the contract at all, its theoretical price doesn't matter since I can just neutralize the entire position upon exercise.
  2. This is a fine example of why most ppl should not be trading options. You can't exercise an option you are short. You may be assigned, but that's a lesson for another day.
  3. You did not read that little red and grey booklet your broker sent you when you asked for options trading did you?
  4. Just buy the same expiration 75 p and let the position expire.

    You will be trading the long stock against a synthetic short (long p / short c). If theta has killed the value of the put then you may be able to lock into the conversion for a small profit.
  5. cqm


    I guess this is a pretty n00bish mistake!

    I have read the options risk disclosure several times. I usually only trade liquid options and have never held for expiration or been assigned.

    I am new to this kind of covered strategy
  6. cqm


    hold on, so I should buy the same number of wayyyy out the money puts to help with my deep in the money short call?

    can you elaborate on how this would be helpful? the price fluctuations of the underlying would barely move these puts
  7. FSU


    Ogarbitrage is right, this is the easiest solution.

    Notes for the future,

    If this is a hard to borrow stock, you may/will be assigned early.

    There is NO reason to put on this position. You can replicate it by simply selling the same strike puts instead of doing the buywrite you have on. You would then have minimal slippage, less commissions, and you will make more money if the stock is hard to borrow.
  8. cqm


    I got assigned. position closed.
  9. cqm, do yourself a favor and read this before doing anymore exotic structures.

  10. spindr0


    That will lock in a loss if the time premium received for the short call does not exceed the premium paid for the put (OP's post implies that assignment would be a break even).

    Even tho XYZ is not likely to drop 25 pts, for some, doing the conversion at a small loss would provide peace of mind. Worst case scenario would then be dead money until expiry.
    #10     Jan 20, 2012