Ryan,
PHLX doesn't explain why their thetas are two decimal places different from everyone else', but the time decay can be ball parked since I am working with a short time horizon.
Current nut $9.75
Scenario 1: Edify drops to 10 by the end of this week and holds.
The spread between the June 10s and the June 12.5s should be roughly 1. So the nut goes to $8.75 on the roll down. Still looking at 12% for two months. I don't think the puts would change enough to beat the bid-ask spread here, so if I sideshow with 8 7.5s I cut my return to 7% by using them as insurance. Still, that's 4%/month with margin.
Scenario 2: Speculators so disappointed about the lack of suitors the stock goes to 7.5 a week later. Roll down again. A bit closer to expiration the spread might be a bit more favorable, say 1 1/4. Nut goes to $7.5. This is close to breakeven, then. Had I bought the puts, however, they'd likely sell for ~2 1/4, giving me a 1 3/4 gain per put. With 8, that would put my nut down to $5.75, for a return of
23% for the two months or 16% per month with the margin.
If the stock holds above 12.5 and I buy all eight my return drops from 28% to 23% (roughly 40% and 35% with the margin). HMMMM. Might be worth getting a few.
Another idea, perhaps more consistent with my outlook, is buying two or three June 10 puts. Time to break for lunch while I look at that.
Funny, my friends think I don't work.
Comments, folks?
Cheers, Tuck |
