Ep,
"And if the market is going the wrong way, you can close out on the first position with only one commision and bid/ask loss."
I wish it was this easy. Let's say you are looking at an option spread and you think the RIMM Jun 70/65 put spread is the way to play.
If you buy it now, you pay $4.40 for the 70 put and receive 2.10 for the 65 put, or a net debit of $2.30. You're paying $2.30 for the chance to get $5.00 in a few weeks; not bad if you are right.
By legging in, though, you buy the 70 put for $4.40 and hope for a swoop down to take the 65 put price up to $3.40, so you can complete the spread for a net debit of $1.00. This is good, a nice 4 to 1 reward to risk ratio.
But what if RIMM rallies tomorrow and the next day and goes up to $71.50 (or $71 but volatility drops). Now your long position value has fallen from $4.40 to $3.11, a loss of $1200 or 27%.
If you put the spread on immediately, that counter move to $71.50 only erodes the position $500, thanks to the hedge. You're still not happy, but you're about $700 happier than otherwise.
They don't make it easy, that's for sure.
Kb |
