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American Capital Agency Corp. Message Board

  • reits_r_us reits_r_us Aug 3, 2012 11:42 AM Flag

    Short Put Spread

    The Short 13Mar40/36Put spread for 3.45 is a pretty bullish trade. Somebody thought it was worth 300 contracts.


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    • I said to myself, what the heck and jumped on Sep 35/37 bull put. Got in for 1.62 cr. w/ PPS @ 34.80. If we go on a monster run I can roll the position down to keep relative difference in deltas similar.

    • Let me think out loud. If the stock goes up by $10 then both puts become worthless and he keeps the $3.35. If it goes down by $10 then he will be forced to buy shares at $40 but can sell them at $36 so he loses 65 cents. That works. When the stock goes up a little then the $40 put will decline in price faster than the $36 put which is closer to the money and thus has a smaller delta.

      I wonder if these guys have tools that allow them to plot the gain / loss as a function of stock price so they can see how the slope changes. I would want to know that before I made such a trade so I could optimize the difference between the prices and how close the lower put is to in the money so as to be commensurate with the expected amount of price appreciation. What I would want to know is the expected gain for a certain increase and a certain decrease in stock price.

      And then there is this pesky bid ask spread. I hate buying one side of the spread not knowing if I will get the price I want on the other side of the spread. I guess one should try and sell the furthest out option first since that will have the worse bid ask spread and if that doesn’t work as desired then one is not left holding the other lower priced puts.

      • 1 Reply to raybans2
      • Where did you come up with $10 increase in PPS? If the stock is above $40 by March the entire premium received is profit.

        This may not be a play guessing where the price will be, but rather playing the deltas. The 40 will have a delta of -1 for several strikes. The long put is already delta -.5 and will decrease as price increases.

        To help with the the b/a spread problem, place a combo order. One price determines what you are willing to trade the spread at and the MM is left to figure out which side he can take it out of. He has a little more room to wiggle over legging in.

    • Doc,

      Just had a thought. This could be a play setting up for end of year tax cliff and anticipating money running to the sideline at the end of the year. Thoughts?

    • I like the sound of that play. How about Sep 35/37 for 1.60 cred. Spread would compress faster.

21.405+0.025(+0.12%)2:36 PMEST

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