Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Vol who wrote (1698)	9/25/2000 2:33:15 AM
From: Dan Duchardt	Read Replies (1) \| Respond to of 2317

Vol, Let me preface this by stating that this is not my strategy I got that part. <ggg> I'm just trying to see if the strategy makes sense to me. Maybe 18% is the IV? Please double check me on this. I checked, and 18% is what my data service is giving for delta. Checking a bit more carefully, I see they are also quoting the volatility at 167, which is quite unbelievable and no doubt totally messing up the delta calculation. I believe your source is the one to rely on, and that certainly puts things in a different light. I'll have to withdraw my comments based on the erroneous data. Wish I could erase the whole thing. At 50%, the initial net delta is near zero, so the gain from time premium decay on the short puts should be the most significant factor. Neglecting the small delta changes and slight time decay in the DEC01 1600, SPX has to go down twice as far as the time premium, or up twice as far as the total premium collected on the short put before you lose. At least that's what my brain is telling me at this late hour. IF this is right, it is certainly a lot more attractive than what I got from the bogus little delta. Even though the long put costs little or no time premium, you still have to put up all that intrinsic value. The only advantage is some protection against a near term down move, at the expense of eating into your gain if SPX goes up. That makes me think the most sensible approach would be to enter the position only when you have a neutral bias (or be brave enough to leg in), and then sell the ATM near term put to maximize the time premium. I guess I need to be more awake to think about the cost of carrying the position and the potential return on investment. Off hand, it looks pretty good. It might be interesting to look at some equity options from this point of view. Is there really anything special about the SPX that makes this look good, or might it be equally attractive for relatively stable stocks? Dan