If LU moves substantially above 120, I am effectively short at 120, while the ASND puts don't offset any exposure.
I think you've missed something here (or maybe I have). If LU moves substantially above 120, you are effectively short at 120, but your short ASND puts will be expiring worthless, which should offset your exposure somewhat.
I think the out-of-the-money short straddle and the in-the-money short straddle are almost isomorphic. Forgetting ASND and LU for a moment, consider writing a put on hypothetical company X at 80, and writing a call on company X at 100. If X's stock stays in the 80..100 range, you keep both premiums. If the stock drops below 80 or rises above 100, your return is reduced. Way below 80 or way below 100 (more than the combined premiums), and you lose money.
Now invert it: write the call at 80 and the put at 100. Maximum return is again between 80 and 100 (both options get assigned, but the assignments cancel each other out). Below 80 or above 100, the return is reduced (only one option gets assigned, you use the premium from the other to offset any exposure). Way below 80 or way above 100, and you lose money.
What you propose is more complicated due to the arb spread thing (which will improve your return and reduce risk, provided the merger doesn't fall through); the different expiration months; and the non-round conversion factor (.825). Still, seems like a pretty good bet to me. Personally, I might write both the puts and the calls a little higher (say, ASND put at 75 or 80, and LU call at 125 or 130), for more upside protection at the cost of a little downside protection. It all depends on how optimistic you are: come June, is LU more likely to be at 130 or at 70? |
