Herm,
I have no idea why you're involving the 20-day volatility with delta here. In McMillan, delta is defined as the amount an option price will move per one point move in the stock. If my puts have a -.45 delta and the stock drops 1 3/4 points, the puts should be adding (-.45*-1.75= ).7875. If this drop started when the ask was 1 3/8, the ask should now be 2 3/16 (see page 743). Granted the delta changes a bit as the stock moves, but the gamma is .15, so that effect is small. Actually, it should make the delta even more favorable, and now it is: -.54, according to PHLX site. Meaning the ask should be more like 2 1/4. This value predicted by the greeks is a full half point (~ 35%) away from reality (ask currently 1 3/4). Your calculation doesn't gibe with McMillan, but it sure seems closer to the truth. I'm confused.
The reality is that with the bid at 1 9/16, I make about 6 bucks per contract on almost a two point drop (after covering MM spread and commission). If this is going to happen on a regular basis, sideshows are not for me! If I bought enough puts to cover the lower deltas, I wouldn't have any money at all left from the call write, if the stock didn't drop hard. Was my mistake in buying the "high deductible" puts? Would it be better to buy fewer puts that are already in the money (it certainly looks that way in hindsight), such as the August 15s? How do you choose which puts to buy for a sideshow?
Cheers, Tuck |
