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Ira,
there is no unlimited risk.
When the puts expire, the position has run its course. Simply liquidate the
whole position before put expiration. Risk will be limited to those $2,700
mentioned previously as the worst case. That's what the chart shows, too.
Otherwise, if you choose to retain the covered calls after put expiration,
you have a *new* position unlike the one depicted in my chart, and you have
to manage it in its own right.
When the calls are being exercised against you, you simply liquidate the
long QQQ position, pocket the remaining time value of the calls, and still
own the long puts. So where is the unlimited risk? There is none.
You wrote, "if my thinking hasn't gone all bad on me, then the maximum value
that a time spread has is at the strike price and the spread collapses as
price moves away from the strike price."
Well, that's true when the short leg is in the near month, and the long leg
is in the deferred. In our case, it was the other way around; therefore, we
got a mirror image of that curve. You might want to read up on this in a
good option book.
You wrote, "By the way a time spread is one in which both the long and short
are at the same strike price. I don't believe, that your example used the
same strike prices, therefore, not a time spread."
Well, usually the time spreads you describe are termed "horizontal", whereas
ours was a "diagonal" one, but that's just terminology. You may call it a
"Donald-Duck spread" for all I care, and it will still be defined by the
mathematical properties of its constituent options.
You wrote, "The principle of a time spread is to sell it at the strike and
buy it as it moves towards the strike." Again, this would be true only for
those time spreads that have the short leg in the near month, and the long
leg in the deferred.
Best regards,
Michael
> -----Ursprungliche Nachricht-----
> Von: Ira Tunik [mailto:irat@xxxxxxxxx]
> Gesendet: Tuesday, February 19, 2002 23:09
> An: realtraders@xxxxxxxxxxxxxxx
> Betreff: Re: [RT] Selling Covered Calls
>
>
> I am sorry that we disagree, but there is risk in his postions.
> The assumption
> is that he can roll, or that he is deep in the money on one side
> or another.
> What happens when the put expires and price is between the
> strikes, now he is
> exposed. What happens if the call is exercised? There are a
> lot of what ifs
> in the position. As for the put spread equivilant, your chart
> shows one thing,
> but if my thinking hasn't gone all bad on me, then the maximum
> value that a time
> spread has is at the strike price and the spread collapses as
> price moves away
> from the strike price. By the way a time spread is one in which
> both the long
> and short are at the same strike price. I don't believe, that
> your example used
> the same strike prices, therefore, not a time spread. The
> principle of a time
> spread is to sell it at the strike and buy it as it moves
> towards the strike.
> Now our terminology may be mixed, but those are my thoughts on
> the matter. Ira.
>
> MikeSuesserott@xxxxxxxxxxx wrote:
>
> > Ira,
> >
> > please look at the chart "ben.gif" that I sent previously. Now read the
> > caption. It says,
> >
> > Long 2000 QQQ
> > Short 20 Apr 36 Calls
> > Long 20 Mar 34 Puts.
> >
> > Isn't this exactly what you just confirmed Ben wrote? "Ben is
> long puts and
> > short calls and long stock," you said. So the chart "ben.gif"
> depicts Ben's
> > position. Is this understood? Are we agreed? OK so far? Can you
> live with
> > that? :-)
> >
> > Now when you look at that chart, you see that this position has
> no unlimited
> > risk anywhere. Can you see that? Risk is limited to about
> -$2,700. That's
> > the lowest P/L level that curve will reach during the lifetime of the
> > position. You see that?
> >
> > So we have now established that there is no unlimited risk in Ben's
> > position, in contrast to what you promulgated here.
> >
> > Next. My point was that Ben could have established an
> equivalent position by
> > doing a calendar spread. So what I am saying is that the long puts/short
> > puts calendar spread shown in the second chart looks exactly
> the same and
> > has the same risk/reward characteristics as Ben's original position.
> >
> > The blue curve in the first chart shows Ben's position.
> > The red curve in the second chart shows a calendar spread position.
> > I said these two are equivalent, meaning, "blue curve is same
> as red curve."
> >
> > The charts prove that this is so.
> >
> > Regards,
> >
> > Michael Suesserott
> >
> > > -----Ursprungliche Nachricht-----
> > > Von: Ira Tunik [mailto:irat@xxxxxxxxx]
> > > Gesendet: Tuesday, February 19, 2002 21:30
> > > An: realtraders@xxxxxxxxxxxxxxx
> > > Betreff: Re: [RT] Selling Covered Calls
> > >
> > >
> > > Once again you have the wrong information. Ben is long puts and
> > > short calls and
> > > long stock. Definitely not long puts and short puts. Check your
> > > input again.
> > > Put in long 35 puts and shourt 36 calls and see what you chart
> > > shows you. Ira
> > >
> > > MikeSuesserott@xxxxxxxxxxx wrote:
> > >
> > > > Ira,
> > > >
> > > > I am so glad to hear that you were able to retire early (I was,
> > > too), and
> > > > that you believe you understand options.
> > > >
> > > > Unfortunately, your analysis is still totally wrong. Ben's
> > > original position
> > > > is indeed equivalent to a calendar spread, and furthermore,
> > > risk is totally
> > > > limited here.
> > > >
> > > > To prove this, please find attached two charts. The first
> one, ben.gif,
> > > > shows Ben's position as originally indicated by him. The second
> > > chart shows
> > > > the equivalent calendar spread. If you were to superimpose
> > > them, you would
> > > > find them exactly congruent.
> > > >
> > > > You may also notice that there is no unlimited risk, and that
> > > the greatest
> > > > profit potential is to the upside.
> > > >
> > > > Regards,
> > > >
> > > > Michael Suesserott
> > > >
> > > > > -----Ursprungliche Nachricht-----
> > > > > Von: Ira Tunik [mailto:irat@xxxxxxxxx]
> > > > > Gesendet: Tuesday, February 19, 2002 17:31
> > > > > An: realtraders@xxxxxxxxxxxxxxx
> > > > > Betreff: Re: [RT] Selling Covered Calls
> > > > >
> > > > >
> > > > > Reread what I wrote. I didn't say he should fear anything. He
> > > > > actually put on
> > > > > a collar of sorts for a credit. using the 34 puts and the 36
> > > > > calls to net a
> > > > > profit. His maximum risk is 1 3/4 to the downside with 2.40
> > > > > income. net profit
> > > > > at 0 on the stock is 2.40-1 3/4. On the upside he makes 1 point
> > > > > on the stock
> > > > > plus the 2.40 in premium less the cost of the put. Having been a
> > > > > market maker,
> > > > > trading my own account and able to retire 17 years ago, I think I
> > > > > understand
> > > > > options. Ira
> > > > >
> > > > > MikeSuesserott@xxxxxxxxxxx wrote:
> > > > >
> > > > > > Ira,
> > > > > >
> > > > > > your argument is in error. In Ben's original position, being
> > > > > long 2000 QQQ,
> > > > > > why should he fear that position to go to 100?
> > > > > >
> > > > > > Even if the stock were called away early, it would mean for
> > > Ben to have
> > > > > > realized his profit sooner, and to still own the long puts.
> > > > > >
> > > > > > The equivalence of the two positions is a mathematical
> > > fact. Just do the
> > > > > > math or feed the positions into some option software, and
> > > you'll see for
> > > > > > yourself.
> > > > > >
> > > > > > Regards,
> > > > > >
> > > > > > Michael Suesserott
> > > > > >
> > > > > > > -----Ursprungliche Nachricht-----
> > > > > > > Von: Ira Tunik [mailto:irat@xxxxxxxxx]
> > > > > > > Gesendet: Tuesday, February 19, 2002 16:53
> > > > > > > An: realtraders@xxxxxxxxxxxxxxx
> > > > > > > Betreff: Re: [RT] Selling Covered Calls
> > > > > > >
> > > > > > >
> > > > > > > Wrong. You do not have a calander spread, you have unlimited
> > > > > > > risk. to the
> > > > > > > upside. The stock is the protection against the stock going to
> > > > > > > infinity. Look
> > > > > > > at where you are with the stock at 100 and then tell
> me you have
> > > > > > > a time spread.
> > > > > > > Ira.
> >
> >
> > To unsubscribe from this group, send an email to:
> > realtraders-unsubscribe@xxxxxxxxxxxxxxx
> >
> >
> >
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