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Ira,
Thank you for your clarification, which helped greatly.
I asked questions because it seemed to me, in Ray's #2 position
diagram, that there would be profit if the underlying was near
the LEAP strike price or above. Therefore, Ray had 2 of the
3 market possibilities in his favor - he would be profitable
if the underlying stayed where it was or moved higher.
Another issue has to do with the edge in options trading and
the programs used to calculate fair value. I may be wrong here,
but it is my understanding that all models used by these programs
take the current price of the underlying and assume that future price
action from that point will be purely random, given the current volatility.
In other words there is no weight given to the "trendiness" of a market
and the effect that may have on future price action. Whatever affect
market trend or fundamentals may have on future option prices must be
given to it, if it is at all, not by the computer programs but by the
individual discretion of the MM. Is this your understanding also?
Neal
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