Controversial Option Discussion Of The Day - Calls and Puts

[investedz]

You may want to check your calculations

Since the bear put and bear call spread at the same strikes are synthetically the same, the risk should be the same, otherwise arbs.

E.g. using arbitrary prices
1) The bear call spread receives $1
Total risk is $5 [width of the spread] less $1 = $4

2) The bear put spread costs $4
Total risk is $4

If spot trades below $55 on expiry by one cent:

1) The credit spread as you say expires worthless and you keep the $1 credit received

2) The debit spread will be ITM
The short 55 put is ITM by 1 cent [$55 - $54.99]- so represents 1 cent loss
The long 60 put is ITM by $5.01 [$60 - $54.99]
Total gain of the trade is $5.01 - $0.01 = $5
Less the debit of the trade = $5 - $4 = $1

Oh no!! This is the same profit as the credit spread

Ahhh yes you are correct! I got mixed up with the bull put spread( buy 55put sell 60 put). That's what you get for staying up too late.

The more I look at comparing the two. The more they look like twins.

LOL, why won't this question die!!

The question is then is the fly for a credit better than the debit fly that has the exact same payoff?

I guess the answer is away from the fundamental payoff at expiry and more the market pricing of the underlying options, during entry into the trade. Eg if the ask of the option looks better than the bid of the option then you would credit the trade, and vice versa....

 

[wayneL]

Sorry mazza,

I gotcha now, yep debit verses credit, same payoff, can't see the advantage of one over the other.

Perhaps the thought of a couple of grand in the hand today is more attractive than waiting around, ( assuming everything goes according to plan).

Ahh! Sorry picked up the wrong concept. I thought you were comparing, say:

+1 ITM call
-2 ATM calls
+1 OTM call

versus

-1 ITM call
+2 ATM calls
-1 OTM call

i.e. short gamma versus long gamma

 

[cutz]

Hi Wayne,

Yep i was comparing both sides of a natural butterfly but i've just realized that mazza was discussing synthetic equivalents ( credit spread verses its synthetic debit equivalent ).

 

[mazzatelli1000]

Sorry mazza,

Perhaps the thought of a couple of grand in the hand today is more attractive than waiting around, ( assuming everything goes according to plan).

LOL I was only joking around
You have to put up margin though, but if it makes you feel better

I hear you, but no haven't done videos. Might be something I do in the future though.

Can you present it like Ron Ianeri? I swear sometimes I think his voice is going to crack LOL

 

[wayneL]

Can you present it like Ron Ianeri? I swear sometimes I think his voice is going to crack LOL

Haha!

I like Ron, he seems to be one of the better presenters out there.

Unfortunately, I'm more of a baritone.... and my countertenor voice disappeared way back in the mists of time, a victim of the amber nectar I'm afraid.

 

[wayneL]

Here's one:

There is a seminar clown who terms covered calls as "renting shares".

Why is this a misrepresentation of covered calls?

 

[Tradesurfer]

seminar clowns...funny

an owner of a home who rents to someone still has the opportunity for unlimited upside potential of the underlying asset.

or another way to say it- if homeowner A bought for $200k and rents out at $1000 a month. It would only be like selling a covered call if the renter had the right to buy the house at $300k for example even if the house was now selling for $500k.

something like that.

both the cvd writer and a homeowner does have the downside to zero on the underlying assett so in that regard....

cheers

Derek

 

[cutz]

Here's one:

There is a seminar clown who terms covered calls as "renting shares".

Why is this a misrepresentation of covered calls?

I've just thought of a theory on that,

May be something to make option trading (for lack of a better term) appeal to the traditional property investor type, baby boomer.

I don't know how these clowns operate but i reckon they may try to draw parallels between receiving rent and receiving premium.

 

[Tradesurfer]

I do seminars but hopefully not a clown

since Vega was mentioned before though- thought I'd post a quick chart on RIMM Implied Vol.

quick vega lesson and excuse my ignorance if this was already mentioned..but say your Vega is .05

If implied volatility went from 40%- 60%- thats 20% difference. For each 1% in implied vol take the vega amount times that to understand what the change to options premiums would be.

So 20 (IV moving 20%) x .05= $1.00

So if implied vol went down 20% then you'd expect to see a $1.00 drop in the options premium and vice versa if it went higher.

20% can easily happen especially around earnings.

cheers

Derek

 

[wayneL]

seminar clowns...funny

an owner of a home who rents to someone still has the opportunity for unlimited upside potential of the underlying asset.

or another way to say it- if homeowner A bought for $200k and rents out at $1000 a month. It would only be like selling a covered call if the renter had the right to buy the house at $300k for example even if the house was now selling for $500k.

something like that.

both the cvd writer and a homeowner does have the downside to zero on the underlying assett so in that regard....

cheers

Derek

Yes partly.

–verb (used with object)
6. to grant the possession and enjoyment of (property, machinery, etc.) in return for the payment of rent from the tenant or lessee. (often fol. by out).
7. to take and hold (property, machinery, etc.) in return for the payment of rent to the landlord or owner.

At no time does possession or enjoymnet of the shares be "granted" to the call buyer during the term of the option contract.

The call seller grants the right to buy the shares to the buyer, but the distinction is in timing. Possession is only transferred on termination of the contract as opposed to during the contract as is with renting.

As pointed out by Derek, the option writer is entering into a contract obligating him to sell share at a set price, if called. The call seller receives a fee (the premium) to compensate for opportunity risk... and real risk of loss if the call is not covered.

Looking at the other side, in no way is the call buyer renting shares from the call seller, simply paying a one off premium fro the right to buy.

A more accurate situation which could be called renting shares, is in the process of short selling. Holders of shares "lend" shares to brokers to be short sold in exchange for a fee, ipso facto renting them out. Nothing to do with options.

 

[wayneL]

I've just thought of a theory on that,

May be something to make option trading (for lack of a better term) appeal to the traditional property investor type, baby boomer.

I don't know how these clowns operate but i reckon they may try to draw parallels between receiving rent and receiving premium.

Yep, that's exactly the reason cutz, but technically incorrect and fosters an incorrect understanding and attitude towards trading CCs.

 

[wayneL]

I do seminars but hopefully not a clown

Derek,

You have to boast of 45,700% gains and have pictures of fancy cars, tropical scenes, and middle aged couples looking like they're having the time of their life in front of a computer screen on your website to qualify as a clown.

No cigar mate.

 

[Tradesurfer]

got a bonus vocabulary lesson

cheers

Derek

 

[Tradesurfer]

Derek,

You have to boast of 45,700% gains and have pictures of fancy cars, tropical scenes, and middle aged couples looking like they're having the time of their life in front of a computer screen on your website to qualify as a clown.

No cigar mate.

I know. Always seems like the students are riding on speedboats out on the ocean that they just bought from the profits.

Unfortunately I get a lot of fowks who have already been through the ringer on those. I just wouldn't be comfortable ever representing myself like that.

but it is kinda funny how you describe it. Funny Stuff!!

 

[moreld]

Great thread.
I know Cartman's question got a couple replies, but I'd like to throw in my 2 cents. "it actually confuses me why so many "long term" investors go out and buy BHP or CBA or whatever when they could write put options and collect the monthly premium and own the stock at a lower cost base if exercised ----- using this strategy at cycle bottoms seems a common sense/simplistic way to use options/buy stocks"

Whenever you sell a Put you are taking on both downside risk and "risking" upside gains. You do that for a small premium, an insurance payment from someone who wants to keep the upside potential and remove the downside risk.

While it seems like a great strategy to sell Puts at market bottoms, or let's say low market valuations to avoid market timing discussions, it is not necessarily a great strategy. If your market prediction is good then you should do better by buying calls. Especially if you pay up, and buy enough time and buy ITM to avoid the lottery ticket style of many options buyers.

Saying that, in general I sell options. The most important part of options is exactly the same as for all investing, find a strategy that matches your personality.

Like buying calls if you buy the stock you are buying the upside potential, but without the time expiration or extra cost. While you fore sake the inbuilt put in the call and leverage.

 

[Tradesurfer]

A lot of the opportunities aren't around any longer but I did wind up doing some synthetic long positions at so called bottoms.

Basically selling puts and buying calls. But the interesting thing was that the puts had double the implied volatility of the calls so essentially I more than paid for the call and then some because of it.

I hear what your saying though on just selling puts. You do well for that month but yeah not much beyond the premium in upside. Although the premiums may have been inflated.

 

[wayneL]

Basically selling puts and buying calls. But the interesting thing was that the puts had double the implied volatility of the calls so essentially I more than paid for the call and then some because of it.

If so, you could have gone for the risk free arb. i.e. the risk reversal

long call + short (corresponding) put + short stock = locked position

Guaranteed profit if puts > calls in the put/call parity equation.

 

[wayneL]

OK here's the next one:

80% of options expire worthless.

True or false?

Therefore it is better to be a seller than a buyer.

True or false?

 

[investedz]

OK here's the next one:

80% of options expire worthless.

True or false?

Therefore it is better to be a seller than a buyer.

True or false?

I have seen those 2 statements somewhere before, they seem to be catchy phrases when put together, but yes they are ambiguous.

The 80% probably refers to the total amount of options of all strikes of the month that expire out of the money.

Though that also wouldn't make sense because all call (put) options with strikes below (above) the share price, would be ITM... which is about half the options...

Hmmm what is the 80% figure?


I see what you and Mazza are getting at though:

XYZ shares @ $50 on expiry date

XYZ $60 bought calls expire worthless (loss)
XYZ $60 sold puts expire ITM (loss)

XYZ $40 bought calls expire ITM (win)
XYZ $40 sold puts expire worthless (win)

 

[investedz]

Ok after a bit of thinking, the 80% would likely be the total open interest of options transacted that were OTM.

So statement 1 could be true.

However it does not "therefore" mean Statement 2 is true.