|
PureBytes Links
Trading Reference Links
|
CalaxCorp@xxxxxxx wrote:
> Dear RTs and option-traders out there:
>
> I need some advice please, regarding my option spread on AOL--
> Facts --
> 1. I am holding deep in the money Dec 50 calls with current bid at 39 1/8 and
> ask at 39 5/8. Today's volume for the option at this strike price was 114, and
> open interest 759.
>
> 2. I am short the same number of contracts of deep in the money Dec 55 calls
> with current bid at 34 1/4 and ask at 34 3/4 today. Today's volume for the
> option at this strike price was 113 and open interest 767.
>
> 3. Just for reference purposes, the underlying stock (AOL, which I do not own)
> closed at 91 3/8 today.
>
> I wonder if these below are my only action choices (?) Buying the short call
> option back is not feasible.
> (A) If I liquidate the two option positions now simutaneously, I would only
> collect 4 3/8 (= 39 1/8 - 34 3/4) less commissions on option transactions.
>
> (B) If I dont do anything and let the two options get exercised at expiration
> date, I would get a credit of 5 (=55 - 50) less commissions.
>
> Since there is so little difference in delta for these two call options
> (because they are both so deep in the money and have the same expiration
> date), most of the difference is due to the spread between bid/ask.
>
> This is my thinking-- It is probably unlikely that the call option that I am
> short will be exercised before expiration because it is so deep in the money.
> Thus it is better to just wait for the automatic assignment.
>
> Even if the short side does an early assignment on me, and my broker will be
> forced to do an early assignment on my long side to cover that, there is no
> bid/ask spread loss for me. Is there?
>
> Are there any holes in my above reasoning and thinking?
> Any comment are very much appreciated.
>
> Thank you very much.
>
> Sincerely,
> Bill W
>
You shouldn't assume that in exiting this position as a spread that you will
have to buy on the ask
and sell on the bid on both sides. Chances are, with this spread so far in the
money, the spread market
is probably something like, 4 3/4 - 4 15/16. You may have a chance to exit by
entering an order
to sell the spread at 4 13/16 or perhaps 4 7/8. This will free up your capital
and allow you to sleep at night. By the way, some brokerage firms rip off the
public by charging stock commisisions on exercise and assignments. This can be
expensive than option commissions. The cost to the firm for an exercise is usually
zero or perhaps a $1 ticket charge.
Cheers,
Norman
|