# Option series selection



## craft (6 December 2011)

I have just elected (deadline 6th) to take CBA shares as consideration for Count takeover. CBA share price is set at $47.18.

Shares won’t be allotted until 13 December. I am thinking of taking some insurance to cover this period in the form of a put option.

Do any regular option traders have any thoughts on which option series to use?

I’m thinking nearest month and a price somewhere between $47.50 and $50.00. 

I don’t have a CFD account so hedging by that method isn’t really feasible.


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## sails (6 December 2011)

Craft, have you checked the ASX notices to see how options will be handled with this takeover?  

In addition, if there is any uncertaintity in the underlying share, make sure you understand volatility and how it affects option pricing...


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## village idiot (6 December 2011)

if you are just concerned with protecting your position for a week or so, front month is right, and you want to pick one that pays the least for that protection 

if you are happy to pretty much lock in the current price for least cost , i would pick the dec 51.00 put currently 1.08/1.19. i would pick higher but there are no bids/asks for higher strikes at present

if you happy to let CBA run a bit and just want protection against getting less than th 47.18, the 48.00 put at .21/.24 looks best value

if you do pick a put that you are likely to exercise as your exit strategy, make sure you are aware of how much brokerage that exercise will result in. eg with comsec it is robbery, but then so is the commission on buying the put in the first place


plus what sails says


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## wayneL (6 December 2011)

village idiot said:


> if you are just concerned with protecting your position for a week or so, front month is right, and you want to pick one that pays the least for that protection
> 
> if you are happy to pretty much lock in the current price for least cost , i would pick the dec 51.00 put currently 1.08/1.19. i would pick higher but there are no bids/asks for higher strikes at present
> 
> ...




You are advocating a position that is a front month OTM long call synthetically.

Are you happy with that advice?


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## craft (6 December 2011)

Thanks Guys

I decided to go CBAKT8 Dec 49.00. Paid $40 bucks a contract.

You right about the brokerage!

I plan to sell the puts if they have any value  left after I have control of the shares on the 13th. 

As I see it I have put in place insurance costing $40 per 100 share contract. I will be buying CBA at $47.18 and have protection for anything below $49.00.

Feel like I’m fumbling in the dark a bit here and could have probably engineered a better outcome with more knowledge, but I think I have at least locked in better consideration then taking the cash offer. 

However it turns out, at least I will have learnt some things. Hats off to you option traders, high commissions, spreads, time decay, volatility, leverage - it’s certainly exciting.

ps

feel free to tell me what I could have done better - I would be interested for education sake.

Cheers and thanks


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## village idiot (6 December 2011)

> You are advocating a position that is a front month OTM long call synthetically.
> 
> Are you happy with that advice?




sure, for the circumstances, which if i have got it correctly are that he is exposed to shares that he doesnt want to be, but cannot sell at the moment , and has said he is not in a position to totally offset his poistion by way of short cfd etc. So one part of the synthetic call he cant do anything about, and he wants to buy a put

I suppose I could have advised a synthetic short via long put short call, but I doubt the extra commssions involved (now including at least one exit commission) would justify it.  Instead i advised buying the put that made him synthetically closest to flat of all the options *that had some liquidity*. 

Personally I would have gone more in the money, but at any strike there is some synthetic embedded call to fall foul of the synthetic call police

What would you have done ?


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## wayneL (6 December 2011)

village idiot said:


> sure, for the circumstances, which if i have got it correctly are that he is exposed to shares that he doesnt want to be, but cannot sell at the moment , and has said he is not in a position to totally offset his poistion by way of short cfd etc. So one part of the synthetic call he cant do anything about, and he wants to buy a put
> 
> I suppose I could have advised a synthetic short via long put short call, but I doubt the extra commssions involved (now including at least one exit commission) would justify it.  Instead i advised buying the put that made him synthetically closest to flat of all the options *that had some liquidity*.
> 
> ...




OK I see that you interpret that OP wanted to be flat(ish), just wanted to clarify what your thinking was.

My question then - would the extra commissions of a conversion outweigh the theta of  the synthetic long call? I don't know what you pay for Oz options these days.

What would I have done? 

It depends what my outlook is. Right at this moment I'm bullish on banks in the short term, so would probably want some more deltas... maybe even collar it.


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## craft (6 December 2011)

Theta, delta, collars, synthetic police its enough to make your head spin.

My main aim was to have some protection between today when accepting the script consideration and the 13th when shares are allotted. Protection against a plunge - not a call on price direction.



> synthetic short via long put short call



this has got me thinking thinking thinking. Get some time decay back on my side. Can see how this should have been done more in the money.

Cheers


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## wayneL (6 December 2011)

craft said:


> Theta, delta, collars, synthetic police its enough to make your head spin.
> 
> My main aim was to have some protection between today when accepting the script consideration and the 13th when shares are allotted. Protection against a plunge - not a call on price direction.
> 
> ...




At same strike and expiry time decay is not on your side, it is cancelled out altogether. Combined with your stock position you are locked up with no possible gain or loss (AKA in this instance, the conversion).

At different strikes, you have a collar which only gives you positive theta north of the mid point of the strikes. Below is negative theta.

Moneyness is only relevant if strikes are different.


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## craft (6 December 2011)

wayneL said:


> At same strike and expiry time decay is not on your side, it is cancelled out altogether. Combined with your stock position you are locked up with no possible gain or loss (AKA in this instance, the conversion).
> 
> At different strikes, you have a collar which only gives you positive theta north of the mid point of the strikes. Below is negative theta.
> 
> Moneyness is only relevant if strikes are different.




Thanks Wayne

Cancelling out the time decay is what I was thinking. I think you may have taught me what a collar is and I might god forbid even understand what theta is now. But you've got me stumped on 'Moneyness' . I guess it means the chance to win or lose on the position.

Despite only wanting to be hedged I'm thinking about getting myself one of those collars, just for educations sake - hope in my ignorance I don't pick up a noose instead.

Thanks again.


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## village idiot (6 December 2011)

> My question then - would the extra commissions of a conversion outweigh the theta of the synthetic long call? I don't know what you pay for Oz options these days.




I suppose it depends on the amounts involved 

at time I posted the 51 put had about 36 cents of time value in it or $36 per contract.   delta of 51P the was around -.70 so overall posn equiv to +.30


lets suppose 1.5 extra commsions (1 extra in, 50% chance of 1 extra out) at $36 plus spreads of say 4c , or $4 per contract. 

if he has 200 shares involved ($10k worth) , the most time value he could 'save' would be $72 and the cost in commissions and spreads would be $62. plus he gives up the value of the synthetic call which he would otherwise have.  not worth it. 

if he has 2000 shares involved ($100k worth) , the time value he could 'save' would be $720 and the cost in commissions and spreads would be $134. worth it, (assuming you dont assign any value to the call)


so you are right, if he had enough involved the conversion would have made him flatter for less money, if thats what he desired.


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## craft (6 December 2011)

village idiot said:


> if he has 2000 shares involved




More than that. Sorry that was probably relevant. 

Thanks very much for your posts – very useful on my rather steep learning curve.

Cheers


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## wayneL (6 December 2011)

craft said:


> Thanks Wayne
> 
> Cancelling out the time decay is what I was thinking. I think you may have taught me what a collar is and I might god forbid even understand what theta is now. But you've got me stumped on 'Moneyness' . I guess it means the chance to win or lose on the position.
> 
> ...




Moneyness is simply whether in the money, at the money or out of the money.


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## village idiot (6 December 2011)

ok, if there is a significant amount involved its not too late to do something about the Time Value you have paid for, along wayne's line of thinking. couple of possible options; 

If you wanted to lock in a price for the overall position and have no further exposure, you could still sell the 49call for around 1.49. the long 49P/short 49C exactly offsets your long shares. You are selling at 49 whatever happens, either you exercise your put or they exercise their call, but you got paid (1.49-0.40)=1.09 per share for doing so, net sale price is locked in at 50.09 less a raft of commissions. 

If you still wouldnt mind a bit of exposure but just want to protect against a plunge with paying too much to do so, you could sell a 50.5Call now for around 55c , which will more than get you back what you paid for the put. that would complete the collar and overall leave you exposed to the movement of CBA between 49 and 50.5, but with a floor at 49 and capped at 50.5. (Overall it is a synthetic bull spread - in before wayne).
best case scenario you get 50.50 for the shares , plus (0.55- 0.40) per share for teh collar, all less a raft of commssions.

cba dropped a bit while i wrote this but you get the picture


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## wayneL (6 December 2011)

village idiot said:


> (Overall it is a synthetic bull spread - in before wayne)




AKA "collar" </oneupmanship>


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## craft (7 December 2011)

village idiot said:


> If you wanted to lock in a price for the overall position and have no further exposure, you could still sell the 49call for around 1.49. the long 49P/short 49C exactly offsets your long shares. You are selling at 49 whatever happens, either you exercise your put or they exercise their call, but you got paid (1.49-0.40)=1.09 per share for doing so, net sale price is locked in at 50.09 less a raft of commissions.
> 
> If you still wouldnt mind a bit of exposure but just want to protect against a plunge with paying too much to do so, you could sell a 50.5Call now for around 55c , which will more than get you back what you paid for the put. that would complete the collar and overall leave you exposed to the movement of CBA between 49 and 50.5, but with a floor at 49 and capped at 50.5. (Overall it is a synthetic bull spread - in before wayne).
> best case scenario you get 50.50 for the shares , plus (0.55- 0.40) per share for teh collar, all less a raft of commssions.




I had to go out yesterday before getting you post and haven’t put anything in place yet. A Job for today.

Learnt a few things yesterday (mainly what I don’t know about options) – but probably the most important thing I did learn learn (or at least finally comprehend) is just how versatile options are for setting up the amount of risk you want to be exposed to – life may not be the same again.

Thanks again to you and Wayne.


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## craft (8 December 2011)

Just to finalise

I finished up selling some CBADZ7 Yesterday – Dec $51.00 Calls. Not as many as the puts but enough to offset the cost of the puts. (Was considering a longer maturity but couldn’t get my head around the exact effects of that.) 

I’ll probably look to unwind everything after the 13th once the CBA shares are in my account.


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## craft (8 December 2011)

craft said:


> I finished up selling some CBADZ7 Yesterday – Dec $51.00 Calls. Not as many as the puts but enough to offset the cost of the puts.




Getting myself all confused now - did sell less calls (75% as many as puts) but as I received the same for the calls as I paid for the puts I didn't offset all the put costs. (Fully offsetting with only 75% is why I was looking at the longer maturity) 

Just to clarify (or confuse)


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