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>Regarding the recent INTC example,
>too vulnerable to early exercise?
Yes absolutely - the examples were given purely to illustrate that these
spreads can be done in the real world and not just in theory. I think I or
someone referred to this before - in this case the underlying is liquid
enough both in pre- /post-market and during market hours to offset the risk
for minimal friction.
> obviate the whole idea of this spread. The staying power
> afforded by the perceived maximum risk of only $100 would prove illusive.
> the 65 put would have about the same maximum risk
Haven't looked at put pricing from that date, but you're right, long put
makes more sense on the trade if it has the same price.
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As an aside - if the Sep 65p is being offered for $1, the option market
feels that the stock is NOT about to breakout to the upside/downside, but to
trend smoothly either way.
With INTC @ $70, $1 for the 65p is a cheap price. The price of $1 on the Sep
65p represents implied volatility in the bottom tenth of its annual range. A
change in the posture would be a surprise to the intel options market which
would mean that the option holder gets a positive double whammy from the
rise in put price from the increase in implied volatility and a directional
call gone right - whereby the put or tha call gains intrinsic value.
One generally wants to own options in low volatility environments because
volatility tends to revert to mean - so for the short call spread example a
long put would indeed be a better choice because it also offers unlimited
upside and increasing volatility premium whereas the short call spread maxes
out the profit at $60.
The technical picture looks like a CANSLIM formation is setting up with the
stock being just over 4% below the prior high of the 5 month base. IBD data
says the stock has an ER rating of 94, SMR rate of A, industry group
strength A, stock relative strength of 86. The only fly in the ointment is
the Accumulation/Distro rating of C on the stock.
Its 50 day average volume = 37 million shares.
So to further carry out the above into a trade, I would:
a/ Buy stock at 1/8 above the 73.75 high to take advantage of the CANSLIM
setup.
b/ Look for volume confirmation (eg volume in the 42 million + share range
on or the day after the breakout)
c/ Buy any put that would cost me less than the 8% stop loss built into
CANSLIM methodology if
(the strike price + price paid for the put + transaction costs) < 8%.
Thus at $73.875 entry
8% stop loss would mean $5.91 = $67.965 (say $68).
I would look to the Sep 70p to buy <$2 or the Sep 72.5p to buy <$4.50 to get
the same result as an 8% canslim stop, but with the added protection from a
huge opening gap against my long stock position that a put provides but a
simple % stop loss doesn't.
Of course, if I were directionally bearish, any put that made sense on the
"max $$ exposed to loss" basis.
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Re the good Doctor's comment on spreads printing on the tape at CBOE, one
must then look for a data service that broadcasts these... I know CBOT for
example publishes them in the time & sales at their Marketplex data page but
I know that cheaper services like quote.com (which re-broadcasts S&P
Comstock data) and e-Signal (and thus its derivatives like BMI) don't
transmit spreads due to "bandwidth constraints". This problem is felt more
in the energy complex (NYMEX) by me.
Regards
Gitanshu
DISCLOSURE: Long INTC. Not a recommendation to buy/sell securities mentioned
here. Position may change at any time,
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