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In a message dated 3/14/00 2:16:46 PM Eastern Standard Time,
OnWingsOfEagles@xxxxxxxxxxxxx writes:
<< Ben, at your convenience.
Questions:
Below makes you net long 4 contracts at 1300 and flat at 1400.
Assuming June SP opens some AM at 1290 after closing at (say) 1320.
- What protection does this strategy serve in gap limit down move when
options are closed?
- What is "overnight" in reference to? This seems like an initial move.
- How do you change if after gap down open at 1290 it continues south and
next limit open is 1200, where you are not filled due to order overflow?
Thanks
Gitanshu >>
Good afternoon Gitanshu
Nice to hear from you
Lets start from the beginning
i was long 4 SP and got stopped out of my long 2@xxxx 1@xxxx and 1@xxxx
that morning my broker had a fax from me with above stops
he also had the instructions to sell short 1@xxxx 1 @1403 and 1 @1400 and
last@xxxx
at the close of yeasterday and since i never stay naked overnight he bought
4 April 1400 calls at 9750 ($39000)
and sold the 8 May 1300 puts at 5000 each (taking in aprox $40000)
normally at falling market one would not dream of being short puts, however
i am short 4 SP!!
if market opens next day 25 points lower and continue to go lower,, i
have in the morning fax to broker to buy back the 8 puts (at a loss)
THE LOSS IS APROX 50% OF THE GAIN FROM THE SHORT SP because it is
still 50 points from being in the money,,
next he replaces them with 8 May 1275 puts,,
(this is done every 25 points move in the June contract)
so as of tonight for example (if the transaction was done)
lets calculate were i am:
the profit on he short 4 futures is (if we close at 1380) is
86*250=$21500
the 4 Apr 1400 calls are @7250 or =$29000
the 8 May 1300 puts are@xxxx or =$51000
the may 1275 puts bring in 5000*8=40000
so net net ahead $10000 minus comm
if i do nothing then my Max profit is 1300 on the short,,
and my Max loss is 6 SP points (1406+1403+1400+1397)- 4*1400 ,,
there is never a problem in a falling market because you are short the
future but willing to accept a Max profit potential,,
if market takes off
your Max loss is 6 SP points plus comm and the beauty is that the higher
the market goes
the more money you make (long 1400 calls and short 1300 puts!!),,
hope this helps
Ben
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