Topannuity post:
Kirpul- without stock available what about an option play--
How about this spread...
Sell MCDT Oct 50 calls @ $5.80
Buy MCDTA Oct 50 calls @ 3.60
By October MCDTA should equal MCDT
What is wrong with my thinking? Would appreciate any help so I don't do something stupid .
Response:
I've been trying to figure out a way to play the spread, given that MCDT is not available for shorting. Haven't come up with a viable strategy yet. Appreciate your posing possibilities, and correcting anything you see in my analysis or expressing a different opinion. It's kind of interesting that the difference between the two calls is $2.20 while the current difference between MCDT and MCDTA is more like $7. Guess this represents the unavailability of MCDT to short, forcing those wanting to play the spread into the less desirable options market with its relatively high commissions and lack of volume and liquidity. As for your suggested trade, we should be able to satisfactorily answer all the relevant "what if" scenarios. For example, at a 50 strike price, what if both MCDT and MCDTA remain below 50 from now through October? Guess that means we pocket the $5.80 - $3.60 difference, which is good. If MCDT goes above 50 between now and October, you may have the call exercised, forcing you to buy MCDT in the open market to satisfy the call. You would then need to sell your MCDTA call to cover. If the spread stays around $7 instead of falling to enough less than $2.20 to cover the fairly substantial potential commissions, it would be an unprofitable trade. So it doesn't look like a sure bet by any means. You would tend to have a profitable trade only if MCDT and MCDTA stay below 50 the entire time from now to October, or if the spread drops (rather quickly) from its current $7 to only about $1 or less. Given that a few months ago MCDT hit 140, and that as the price of MCDT/A goes up, the absolute spread tends to go up (while the percentage spread stays fairly constant at about 20-30%), this is not a particularly safe bet. |
