To all stock/options investment gurus,
Security: Ebay
Current Price: 33.69
Assumption - Till Jan08 price will be between 0.7 * 33.69 and 2 * 33.69
Leg1 - Collar(call sp,call prem,put sp,put prem)=(1750, 1700, 1750, 20)
Leg2 - VerticalcallSpread(bcall sp,bcall prem,scallsp ,scallp prem)=(5500, 25, 4000, 215)
Leg 3 - VerticalputSpread(bputsp,bputprem,sput sp,sput prem)=(4000, 730, 5500, 2120)
Table of returns is as follows:
Initial Investment: 108
ProjectedPrice,MoneyIn,Gains,GainsPerc
20 250 142 (131.4814814814815)
22 250 142 (131.4814814814815)
24 250 142 (131.4814814814815)
27 250 142 (131.4814814814815)
29 250 142 (131.4814814814815)
31 250 142 (131.4814814814815)
34 250 142 (131.4814814814815)
Same till price = 69.
What is wrong? Commissions are not considered. Well...
Collar = buy security, sell call, buy put
VerticalcallSpread = buy call, sell call
VerticalputSpread = buy put, sell put
Legs of trade are:
Leg1 - Collar(call sp,call prem,put sp,put prem)=(1750, 1700, 1750, 20)
Leg2 - VerticalcallSpread(bcall sp,bcall prem,scallsp ,scallp prem)=(5500, 25, 4000, 215)
Leg 3 - VerticalputSpread(bputsp,bputprem,sput sp,sput prem)=(4000, 730, 5500, 2120)
sp = strike price for the option
prem = premium for the option
so, bputsp = Buy Put's Strike Price
sputsp = Sell Put's Strike Price
Is there any other specific info. that you need ? Thanks for clarifying.
You really have two spreads. What you cave called "leg 1" in really a conversion.
Since quotes change while the market is open, I'll do the math using Friday's closing quotes, the bid for sales and the ask for buys.
Buy 100 shares @ $33.99 = $3,399
Sell 1 $17.50 call @ $17.30 = $1,730
Buy 1 $17.50 put @ $0.20 = $20
Total cost = $1,689.
Value of spread at expiration = $1,750
Total profit = $61 = 3.6% of cost.
You would make more buying a CD.
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What you are calling legs 2 and 3 is actually a box spread.
Buy 1 $55 call @ $0.25 = $25
Sell 1 $40 call @2.30 = $230
Buy 1 $40 put @ $7.00 = $700
Sell 1 $55 put @ $21.00 = $2,100
Total Credit = $1,605
This looks good since at expiration it would only cost you $1,500 to close the spread. As the old saying goes, if it looks to good to be true ...
The problem is that options on stocks are American style, meaning that the can be exercised any time before expiration. In this case, it is fairly safe to assume that you would be assigned the $55 put shortly after you sold it.
Any time you sell a put for less than its intrinsic value, you are giving a the buyer a risk-free profit.
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Conversions and box spreads are are arbitrage positions. You will never find one that earns more than the "risk free" interest rate.
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If the short put is not assigned early you have a winning position since you will have been paid $1,605 for something you that will will close for $1,500 at expiration. (You noted it would never be more than $1,500 which is true, but it is also true it will never be less than $1,500.) Your profit will be $105 plus 10 months interest on $1,605.
However, since you can be fairly sure of being assigned early, the picture changes as follows:
Credit from opening the spread: $1,605
Cost of buying the stock at $55: $5,500
Cost to cover the short call: Unknown
If we make the highly dubious assumption that your cost to close the call is the same as what you paid for it ($230) you will be left with
Long 1 $55 call @ $0.25 = $25
Long 1 $40 put @ $7.00 = $700
Long 100 shares @ ($55 - $21) = $3,400
Total cost = $4,125.
If you end up exercising your long put, your return will be $4,000, for a loss of $125.
It is also worth noting that the combination of a long $40 put and a long stock position is equivalent to a long $40 call. As of Friday's close that call's ask quote was $2.35. So, an equivalent position wourld be
Long 1 $55 call @ $0.25 = $25
Long 1 $40 call @ $2.35 = $235
Total cost = $260
While it is true if these options expired worthless you would lose $260 instead of $175, the fact that you would earn more than $85 interest on the extra $3,865 in your account makes that a better choice. The fact that you would have fewer commissions further enhances the benefit. I would but it's too tough to figure out all the way you've noted all these trades. Put it in plain language and I'll take a look. Many companys post inflated projected gains.
When they fail to meet them, the price plunges.
Like any other stock, price can go up or down. Your trade seems to be ok since you are financing you have a self financing strategy and a strange stock to play with which moves up from less than 20 to assumed 60 and above in short time. Superficially it looks OK. |
