Wednesday, July 7, 2010

RE: [TheOptionClub.com] Re: Adjusting Bear Call Spread

 

Hi Joel,

 

Mind if I ask a question about this old post you did on a Box?

I follow everything up to the point you said:

Once I have the box on, if market moves higher I could sell the 115 116 call vertical (sell 115 long 116) for a credit of .44 which would leave me with a fly at a net credit of .21 +.44 or .65.

 

If you sell the 115/116 vertical, how would you have a fly? Wouldn't you just have the Put vertical left? If the price is higher and all you have left is your Bear Put, aren't you at  -.49 + .44 = -.05 ?

I'm missing how you get a fly out of this.

 

Thanks for revisiting this.

Jim

From: comedynight2000 <comedynight2000@yahoo.com>
To: OptionClub@yahoogroups.com
Sent: Mon, January 18, 2010 4:24:59 PM
Subject: [TheOptionClub.com] Re: Adjusting Bear Call Spread
 

OK, I'll explain the box in reference to a position I currently have and show values of nearby verticals so you can get a feel for how these adjustments work. I'll use Friday's closing prices though of course they will change tomorrow morning.

I am long the SPY 114 115 call vertical (long 114 call short 115 call)which I opened a few days ago for a net debit of 0.29. Current value about .50, so I could close for a profit of .21.

If unsure of direction, I could buy the 115 114 put vertical (long 115 put short 114 put for a net debit of about .49.

At expiration the box must be worth the difference in strikes of 1.00 leaving a net profit of about 1 minus cost of call vertical and put vertical or 1-.29-.49 or .22 which closely matches my profit mentioned earlier of .21, in other words locking in that profit.

Once I have the box on, if market moves higher I could sell the 115 116 call vertical (sell 115 long 116) for a credit of .44 which would leave me with a fly at a net credit of .21 +.44 or .65.

Or, once box is on, and market moves lower i can sell the 114 113 put vertical (sell 114 put buy 113 put for a net credit of .44 also and again an adjusted fly is left with a net credit of .65.
My point being that buying that put vertical to create the box allows me to lock in a current profit and adjust up or down from there.

Also I need to correct my previous post. I meant to say that the 113 call could be bought and the 115 call sold resulting in long the 113 short 114 call or a bullish call vertical.... I hope this helps...Joel


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