Ok, now that I'm home and have McMillian's book to look
at, I know which spread I was thinking of: the combination
write (pg 295) possibly protected, which turns it into
a wide butterfly spread (pg 316).
The combination write is done by selling the
975 PUT and 1100 CALL, which today will pay you $68.50.
If SPX closes between 975 and 1100, you keep the $68.50
as your profit.
Low breakeven point = 975 - 69 = 905
High breakeven point = 1100 + 69 = 1169
You can protect this position by buying a 900 put on
the downside, and/or an 1175 call on the upside.
The protection would cost you $31.375.
Your profit is now $37.125.
If SPX closes below 975, your new breakeven point is
938, your max loss point is 900, and your max loss is
975-900-37.125 = $37.875
If SPX closes above 1100, your new breakeven point is
1137, your max loss point is 1175, and your max loss is
1175-1100-37.125 = $37.875
So, your max gain and max loss are both about $37.50.
But, because we know the behavior of SPX, we can guess that
we'll earn the max gain at least 20/24 months, or 83% of the
time. That means we'll earn $187.5 for every $37.50 we loose,
for a net gain of $31.25 per spread per month.
Doug. |
