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Strategies & Market Trends : Option Spreads, Credit my Debit -- Ignore unavailable to you. Want to Upgrade?

To: Vol who wrote (1696)	9/24/2000 11:37:28 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 2317

Vol, Perhaps I'm missing something, but this doesn't sound right to me. Prices have changed a bit, so let me quote what I am seeing now. (Some prices I see in the quote chain are clearly in error, but I think these are close) SPX at 1448.7 DEC01 1600 buy for 151_1/2 (essentially zero time premium) OCT00 1475 sell for 39_1/8 (~$15 time premium) OCT00 1450 sell for 27 (~$27 time premium) If the 1475 is sold, and the SPX goes nowhere, the gain will be the $15 time premium. If the 1450 is sold, and it goes nowhere, the gain is the ~$27 time premium. If the SPX falls the 1450 is a safer short because you cannot lose until SPX drops 27. And if SPX falls, the value of the long 1600 will go up, but not nearly as much as you have been led to believe. Delta on the 1600 is only 18% according to my data service (there is no way a long term ITM put is going to have a delta anywhere near 50%), and that will change very slowly with price. A $27 drop in SPX will get you about $5. A $35 drop in SPX will put you in losing territory. An upward move in the index would make the 1475 short put more attractive because of the higher premium collected. The long put will not subtract too much from your gain. It would have to go up well over 200 to eat away all your gain on the short. The anomaly you speak of regarding the long term DTIM SPX puts is possible only because they are European style options. Otherwise, you would be able to buy them and "exercise" for an immediate profit (of course there is no underlying to sell as there is with equity options; hence the European style). Given the amount of time you have your money tied up when you buy one of these, and the general tendency of the market to go up, the fact that you are paying no time premium for something that is likely to lose value is not very attractive, and since it is only a weak buffer against losing on the near term short i don't see that it has much value. Dan

To: Vol who wrote (1696)	9/27/2000 12:29:23 PM
From: KFE	Read Replies (1) \| Respond to of 2317

Vol, The SPX diagonal calendar spread you mentioned can be a very profitable strategy in a neutral market. This type of trade is by no means a "fail safe" or a win,win,win situation. When using LEAPS you must understand the different price action that they exhibit. Using the SPX also requires that you realize the pricing differences between European and American style options. A European LEAP put that is deep ITM should be trading at a discount to parity or an interest play would be available by shorting the stock and selling the put. The further ITM you go the more the discount should be because of the carrying costs. This concept is important because unlike American options the European put that is deep ITM will not move point for point on the downside with the underlying. American puts should never trade at a discount to parity because there would be an immediate arbitrage available by buying the put, buying the stock, and immediately exercising the put. When using LEAPS calendar spreads you must also be aware that the Delta curve is much flatter than a short term option. A large move either way in the underlying will result in a loss. It may be easier to grasp these concepts by comparing other strike prices to those mentioned, such as those 50 points above and below and similar strikes with different expirations. Changes in interest rates and implied volatility will also have a much greater effect on LEAPS than short term options and can possibly override the directional movement. Regards, Ken