Long ratio put spread versus call strategy for stock of ABC company
Long ratio put spread versus call strategy for stock of ABC company
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Winodd Dhamnekar · External communityPost link
External question — Personal Finance Stack Exchange
Author: Winodd Dhamnekar
Original post: https://money.stackexchange.com/questions/148998
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
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Part(1)
Long ratio put spread versus call strategy for ABC company
Current market price:$639, view: moderately bearish
Buy 2 February 630 Puts@ 35.00
Sell 1 February 660 Put@ 52.00
Sell 2 February 690 Calls@ 13.00
Net credit:$8
Breakeven 1: $608
Breakeven 2: $652
Breakeven 3: $694
Graph of the payoff profile of this strategy is given below:
Below $608 : Unlimited profit potential
Between $608 to $652 : Loss (maximum loss of $22 at $630 level)
Between $652 to $694: Profit(maximum profit of $8 between $660 and $690)
Above $694: Unlimited Loss potential
Part(2)
Now if we analyze the above strategy with option strategy analyzer, let us see what we get
Now you will notice that maximum profits and losses figures given in
Part(1)
do not match with the profits and losses figures given by the option strategy analyzer at different price levels of stock of ABC company. Why?
In my opinion, Option strategy analyzer considers the squaring off the option trades at the time of expiration while Option strategy given in
Part(1)
considers exercising of the options at those breakeven points at the time of expiration. Is that correct?
Now, which action is profitable 1)to square off the option trade or 2)exercise the option by you or counter-party at the expiry of 30 days time period as the case may be.
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Bob Baerker · External communityPost link
External answer — Personal Finance Stack Exchange
Author: Bob Baerker
Original post: https://money.stackexchange.com/a/149007
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
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There is one small misstatement in your conclusion. On an expiration basis, your position makes money below $608 due to being net long one put. It is not unlimited since the lower bound is $0. Other than that, your analysis is spot on. Therefore, I did not look at the results from the Option Strategy Analyzer.
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Quoted from Forex.com.bd-Editorial External question — Personal Finance Stack Exchange Author: Winodd Dhamnekar Source score (net votes, not local likes): 0 Original post: https://money.stackexchange.com/questions/148998 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Part(1) Long ratio put spread versus call strategy for ABC company Current market price:$639, view: moderately bearish Buy 2 February 630 Puts@ 35.00 Sell 1 February 660 Put@ 52.00 Sell 2 February 690 Calls@ 13.00 Net credit:$8 Breakeven 1: $608 Breakeven 2: $652 Breakeven 3: $694 Graph of the payoff profile of this strategy is given below: Below $608 : Unlimited profit potential Between $608 to $652 : Loss (maximum loss of $22 at $630 level) Between $652 to $694: Profit(maximum profit of $8 between $660 and $690) Above $694: Unlimited Loss potential Part(2) Now if we analyze the above strategy with option strategy analyzer, let us see what we get Now you will notice that maximum profits and losses figures given in Part(1) do not match with the profits and losses figures given by the option strategy analyzer at different price levels of stock of ABC company. Why? In my opinion, Option strategy analyzer considers the squaring off the option trades at the time of expiration while Option strategy given in Part(1) considers exercising of the options at those breakeven points at the time of expiration. Is that correct? Now, which action is profitable 1)to square off the option trade or 2)exercise the option by you or counter-party at the expiry of 30 days time period as the case may be.
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