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American Capital Agency Corp. Message Board

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  • igsteri igsteri Nov 1, 2012 5:06 PM Flag

    Bull Put Spread

    Thanks Doc,

    Indeed I recall our conversations on the risks of assignment which appears to be identical with both Short Put and Bull Put Spreads. In a flash crash they are equally exposed to assignment or liquidation.

    If the Bull Put Spread with the 33/32 gives about .50 credit while the Dec33 Short Put outright gives credit of about 1.5, wouldn't the Short Put Strategy be the more lucrative strategy?

    With both scenarios you need 33+ so the Put/s expire worthless and you keep the credit.

    I hope this is not a dumb question, but I wonder why you chose the spread vs. the short put outright?

    I'm learning options and I find options strategies fascinating :)
    Igster

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    • Igster,

      """I wonder why you chose the spread vs. the short put outright? """

      Oatmeal vs Corn Flakes. It depends upon how I feel....;-)

      Seriously, I feel like times are very uncertain going into Dec EX. The spread reduces risk. Suppose you Short 20 Dec33Puts for 1.50 or $3,000 credit. I short 50 Dec33/32Put spreads for .60 or $3,000 credit.

      If the PPS is at 33 or higher at Dec OPEX we both keep $3,000. If the PPS is at 31.50 @ OPEX you BE, while I lose $2,000. In fact, all the way down to 30.51 you come out ahead. Its below that number that you lose more.

      I am not a Black Swan person as far as AGNC goes, but if the SEC finally gave a decision that mReits can't use leverage, you'd see an overnight drop to about 15.00/share is my bet,(or lower). Those 20 Puts would be down 16.50 x 100 x 20 = $33,000. I would be down $2,000.

      Thus, the spread is simple insurance. Reduces profits but also reduces risk.

      DocReits

 
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