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Strategies & Market Trends : Option Spreads, Credit my Debit
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To: ccportfolio who wrote (172)6/25/1998 4:03:00 AM
From: WTMHouston  Read Replies (1) of 2317
 
To anyone:

I will admit up front to being a novice at advanced option strategies. That said, what, if anything, is analytically wrong with the following scenario.

AMZN Stock price at 100
write July 100 put @ 11.25
write July 100 call @ 9.625

= total premium income + 20.875

If price stays at 100 = +20.875

If price goes to 90:
on put will have to buy at 100 when worth 90 = -10
call will expire worthless
net = +10.875
thus, protected on downside to ~80

If price goes to 110:
will have to sell at 100 with price at 110 = -10
put will expire worthless
thus, protected on upside to ~120

So long as it doesn't go below 80 or above 120 between now and July 17th, the position will make money.

I understand that the true risk here comes from the volatility that causes the large premium to begin with and that the risk comes in a large move outside of the parameters. The risk can be managed and limited, however, by closing the positions to limit the loss if it exceeds the 80-120 profit range: the degree of exposure by doing this depends entirely on when in the next 22 days it exceeds the range: the later, the lower the exposure because of the time delay in the premium. Closing it would lock in the loss, but would also limit it. Assuming that it went to $120 on the day after the positions were taken:

The call would cost around $24 to buy back (time premium reduction and spread - the July 80's only have a $3 time premium). The put would cost around $6 to buy back. Total closing cost of $30: maximum possible loss of $10. Probable loss, if there is one, is even less.

TIA

Troy
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