No matter how many times I try, Yahoo will not allow me to show my trade...I guess it is just too good to share so I do not beg your forgiveness, I simply beg you to flip the bird to Yahoo..;-(
It is so good too, it involves buying the first ITM Put on the open of EX date and shorting an ITM Bear Call spread to help pay for it. The historical success is amazing. We'll see if that works...here goes...
I have been following this board in silence for some time now, using your generous advice to make some money here and there, so thank you very much for sharing.
As for this combo, what's the advantage of doing all this vs just shorting the stock ? I do realize that the spread caps possible loss, but it only becomes effective after PPS of $88, which looks a bit far fetched in this scenario. Am I missing something here ?
Thank you for your kind words. The trade I outlined is a modified synthetic short position. I just placed a stop with the Long Call.
The reason for the hedged Call position is twofold. One, it does prevent upside loss on your short Call, regardless of its unlikely occurrence. Shorting un-hedged calls almost cost me my home on a margin call a long time ago...;-)
Second, it reduces your margin requirement by about 7 fold, changing it from $32,000 on 100 spreads to $220,000 on the un-hedged calls.
This last sentence is again a main difference between the short share position and the trade I outlined. On my trade for 100 combinations you are looking at again $32,000 margin compared to over $400,000 margin for the equivalent 10,000 shares of KMP short.
The disadvantage of my trade is the BE and max loss. BE is approximately 85.90, with the Feb87.50 Long Put and the Feb85.00/87.50 Short Call spread for a net .68 debit.
The max loss is .68 + 2.50 = 3.18 @ 87.50 or higher. This did happen back exactly one year ago. We had almost a 4.00 surge from the open on Jan EX date to the following Feb OPEX. You can mitigate loss by shorting the shares and placing a stop.
So don't bet the farm. If the debt ceiling thing gets settled before Feb OPEX all bets are off. Knowing our boys in blue(Congress), I'm not betting on that...;-)
BTW, that impasse should be almost through "slow cook" by Feb OPEX(2/15/13), meaning whenever the date certain for the vote on the debt ceiling issue, close out your position one day before that date.