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I didn't tell the poster that he should do a
reverse spread. I stated that a time spread is greatest when it is at the
strike price. If that is true and he puts on a 30 time spread when the
stock is at 30 then if the stock moves up or down the spread will collapse and
he will lose money. That was my point.
The other point I made was that it appeared to me
that he was using the leap as a surrogate for the stock and in effect putting on
a covered write by buying the leap and selling the at the money call. I
believe that both statements are correct.
It is probably his intention to keep writing calls
against the leap and eventually own the leap for nothing. That only works
if the stock stays at 30. If the stock drops then the short calls at 30
are worthless and he has to write the 25s or the 20s with ever increasing
risk. If the stock rallies then the spread collapses also and he has to
constantly roll up the short calls. If he doesn't then both calls go to
parity and he loses again.
IN order to make his plan work he has to have a
plan for the stocks move both up and down. Those were the points that I
was trying to make. As for the $2.75, I don't know whether that is fair
value or not. I just used the number because he did. My point here
is that you put on a spread as a spread for a specific amount. Undervalued
or at value. You try to avoid volatility risk. I hope that this
clears things up a little. Ira.
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
sire@xxxxxxx
To: <A title=realtraders@xxxxxxxxxxxxxxx
href="">realtraders@xxxxxxxxxxxxxxx
Sent: Wednesday, February 11, 2004 10:17
PM
Subject: Re: [RT] Calendar Spreads
Ira,Usually you give sage advice, but regarding this
calendar spread discussionyou seem to have misinterpreted some comments in
the thread.The original post was about a calendar spread using a LEAP,
and youimmediately told the poster that he should be thinking about
doinga reverse calendar spread instead, just opposite to his intent.
Then you said that this calendar spread was really a "covered
write",and you must know that the two strategies are really very
different.Now Mark Simms is just pointing out that when it comes to
executinga trade in options, you cannot buy the bid and sell the ask, so
herecommends to the original poster that the trade be "re-profiled".In
other words, Mark says to use a more reasonable debit of $2.75 when you
enter the order, which is the same debit that you accept and use for the
"value" of the spread. You are correct that thethe order should be
entered as a spread order, but looking at thebid and ask quotes for each
option gives you a ballpark figure forthe debit that you can do the trade
for.Neal Yahoo! Groups
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If you do the trade you do it as a spread. There is no margin
requirementother then the spread deficit. If the short is exercised
he can exercisethe leap. The margin in this case is the risk as long as
the short callexpires Before the long call. You don't re-profile a
trade. You do it atvalue or you go somewhere else where you
can. It is your money, it is yourtrade and it is your risk. So
do it by your rules. If the spread is worth$2.75, put it in as a
spread for $2.75 and let it go at that. Ira.----- Original
Message -----From: "Mark Simms" <mar.ko@xxxxxxxxxxx>To:
<realtraders@xxxxxxxxxxxxxxx>Sent: Wednesday, February 11, 2004 8:08
PMSubject: RE: [RT] Calendar Spreads> Looks good, but the
issues I see:>> 1) can you really get the ASK on the short call
($1.05) ?> Sometimes options executions are less than favorable.
Likewise for the> LEAP...can you really get the bid ?> Why not
re-profile this trade with $0.95 for the short call and $3.80 for> the
LEAP ?>> 2) won't the margin requirements for this be high if
the broker does not> allow the LEAP to act as a long stock position
would ?>>> > -----Original Message----->
> From: Raymond Raffurty [mailto:r.raffurty@xxxxxxxx]> > Sent:
Wednesday, February 11, 2004 6:41 PM> > To:
realtraders@xxxxxxxxxxxxxxx> > Subject: [RT] Calendar
Spreads> >> > Hi Rt's,> >> > I have
recently been exploring calendar spreads using stocks other than> >
the QQQ (and similar vehicles). In case someone does not know a
calendar> > spread is buying a distant expiration call (or put)
option, often aLEAP,> > and selling a closer expiration call (or
put) at the same strike orhigher> > for calls (lower for
puts). The idea is that the LEAP acts as a lowcost> >
substitute for owning the underlying stock, while the short option>
> generates cash.> >> > I started by looking for stocks
with low cost Jan. '06 LEAPS andrelative> > high calls expiring
in Sept '04. One that immediately popped up is> >
Bristol-Myers Squibb (BMY) currently trading at $30.05 per share.
TheBMY> > Jan '06 30 Call (WBMAF) is bid at $3.70 or
$370.00 per contract. TheBMY> > SEP 2004 32.5 Call (BMYIZ)
ask is $1.05 or $105.00 per contract. This> > means that if
one where to buy 1 WBMAF and sell 1 BMYIZ the net costwould> >
be $370 - 105 = $265.00 per contract.> > As you can see from the
attached chart this produces a very favorable> > risk/reward
profile. Trading 5 contracts of each call the maximum loss> >
would be $1325.00 while the maximum profit would be $2195.00 and the>
> position would be profitable any ware with BMY trading between
$24.32and> > $59.18.> > Comments anyone?> >
Good luck and good trading,> > Ray Raffurty> >
<< File: BMY1.gif >> << File: BMY2.gif
>>>
>>>>-------------------------------------------------------------------------------->>>>>
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