Underlying: SP500 Expiry: 20Jun16 Strong assumption: Cannot pass speed limit at 2200 before 20Jun16. Buy Put Spread 1980/1900 (25-15=10) Sell Call 2200 (10) Net Premium Zero.
Trading: executing for 40% notional
Comments
Martzee
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One more thing, did you mean June 2015 or 2016? June 2016 doesn't trade those strikes at the prices you list, June 2015 does...
YaKa
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june15 of course. thx
Martzee
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I still love this trade a lot :)
Martzee
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I simulated this trade and:
max profit = $8,000 per contract
max loss = infinite (thanks to naked call)
margin requirement = $42,856 (I do not have a portfolio margin account)
Although it is a margin expensive trade, I still love it.
YaKa
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your margins are very expensive
this is like pricing 2600 in June... and this is not risk anymore, this stress test scenario:)
Martzee
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Well, this is in a paper money account, so the margin is horrible in it. But still, I am a small guy and although TD gave me a better commission than their 9.95 my margin is still higher than yours...
Martzee
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This looks interesting. Here is my assumption of the profit = if the market stays above 1980, you profit the spread minus cost on the debit put spread, but that cost is offset by the short call, so you profit the entire spread width. But the underlying price must not exceed the call strike (must stay below 2200) in order for the call to expire worthless. Is this correct?
Looks like an interesting trade.
What do you do if the price attacks 2200? Would you liquidate the entire structure or just roll the call higher for credit?
Since you have a naked call, how is the entire structure affecting your buying power?
I like this trade a lot!
Martzee
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One more question actually, would you keep this trade all the way until expiration?
YaKa
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2200 strike very unlikely to be passed before expiry... At best it goes and dies there.
If the spot stays here, over time the value of the 1980 put will have greater value than the 2200/1900 Strangle.
Keeping until expiration or not depends on path... if it falls to 1850 in May, I would unwind.
Whatever happens, I am likely to let the call die.
If exercised on the call, i would happily run 40% short at 2200 for a few weeks and uwnind at say 2140..