manalagi, like i said, it's still a great trade no matter how you slice it. when you sell at-the-money puts and buy calls in equal amounts, that's called a synthetic long. the profit/loss outlook is the same as for going long the stock. what you did was a variation on that since you puts and bought calls at different strikes, but the effect is similar to that of a synthetic long.
a lot of option traders like to short puts and calls since the prospective return on equity is very high in a margin account (little margin is required). i don't like to do this because it requires selling a huge number of puts/calls in order to make decent money. this may be a high return on equity, but it creates a blowup risk.
e.g., if you had 100K equity in an acct, and you just sold those puts yesterday when BIDU was at 110, your margin requirement would have been 15.5K according to CBOE. if those puts went to zero you would have cleared 3.5K by May expiration--not bad. but theoretically you could actually sell about 8.5 times that amount, or 85 contracts. if the puts expire worthless you made 35K, which is an incredible return on 100K. the problem is the 85 contracts represent 8.5K a point at delta 1 and can quickly wipe out your 100K equity if there is a big down move. even if you only sell 50 contracts, a big down move could wipe you out. just imagine somebody with 150K account who sold 100 of the 120 strike calls yesterday when you were buying. this morning, when BIDU hits 130, his margin requirement goes to $290,000.
the CBOE has a margin calculator here: cboe.com
note that individuals borkers may vary in their requirements.
before the 1987 stock market cr*sh, lots of people were selling SPX puts and making "easy money", month in month out. then the cr*sh happened and lots of people went BK. since then, the SEC has made it tougher for people to sell naked puts on margin. |
