Your concept is great Roy, but the math is a little off. Here are some corrections:
Scenario 1) PPS 35.00 @ OPEX. You owe the buyer of the 37 Put 2 bucks so your profit is 4.50.
Scenario 2) Common error is that the shares are Put to you at the strike price of 37.00 not the current PPS of 30.00. So you are long the shares @ 37.00 and if the PPS goes back to 35.00 you lost 2.00/share, but you get to keep the 6.50 premium so your profit is 4.50 again. Not bad!
If the PPS stays @ 30.00 you are down 7.00/share and up 6.50 for a .50 loss, still good odds on this trade. I placed my GTC order a couple of minutes ago.
Forgive me, I'm a beginner.
How do we know when the ex dividend date is in relation to the expiration of the option?
Do you need to keep 37 dollars per share in your account in case the option you sold is exercised?
It is likely that the $37 Put will finish in the money. If the stock price falls below $29, you will also need to exercise the put you bought. Regardless, you will likely be assigned shares at $37, and will then likely want to unload them at market if the price is above $29 or exercise your put if it falls below. How does this all work? Are you actually selling the shares that are assigned to you from the $37 put? Back to my second question- thats a lot of cash to have available in your account.
Excellent points Roy and a post Happy Thanksgiving to you! I did that trade last month or so with the MLP flop and got ETP 50/40 Short Put Spread for about an 8.00 spread( I think)and made about 3.00 on the trade. It was one of the few winners during that bleak time...;-(
I was just thinking about that exact trade you mentioned this past week. I like to get a long leg and keep the spread to around a 60/20 potential profit/loss in the best/worst scenario. So if we went to 37 you get to keep 3x of what you would lose in the worse case...
So I like the 37/29 Short Put spread for 6.01 or better. Worse case is 30.99 or lower for a 2.00 loss. Best case is 37.00 or better for a 6.01 profit or 3x the loss potential.
The 37/29 Short Put spread is sweet, IMO, as you would get a profit of 3.00 @ 34.00 PPS @ OPEX. I am expecting 34.00 as a best guess average of where we will be @ EX or OPEX. I tried all combinations to get the most profit @ 34.00 PPS and this is the best spread I could find.
My order is placed. I hope I don't get a margin call with all of these short positions...;-)
Disclaimer: Whenever you enter a short Put position you can be Put the shares at your strike price anytime during the contract(even out of the money short options). So be prepared in the event this happens...Good luck!!