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Strategies & Market Trends : BEFRIEND THE TREND Short-term Options Trading Thread -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (838)	2/14/2002 11:32:13 PM
From: mishedlo	Respond to of 4058

How about buying Mar 60 KLAC and selling Mar 55. At 55. If KLAC gyrates around and ends finally at 55, the straight put buy will yield $5 on a purchase of $3.70. A $2.30 profit on a $3.70 investment. OTOH buy the 60 for $3.70 and sell the 55 for $1.85 Actually as a paired transaction you should be able to do better than this. This costs $1.95 max and the gain at 55 or below is $3.05 on a $1.95 cost basis. Of course if Klac falls to $20 you only make the $3.05. BUT.... How likely is it for KLAC to fall to $20? Also instead of doing 3 straight KLAC puts, for the same $ and I believe less risk, you can do perhaps 5 spreads. Think about this for us. M

To: mishedlo who wrote (838)	2/15/2002 1:47:26 AM
From: Dan Duchardt	Respond to of 4058

M, For example buy the Mar 39 QQQ puts and sell the Mar 36 QQQ puts. At 36 you have a near double, which is better that you would achieve on buying straight puts. Of course you give up anything below 36 but is a near double good enough? Yes... BUT!! You won't get that near double unless you hold on till March expiration. Based on theoretical prices and historical volatility, which are pretty close to the prices I see now, and neglecting any loss to the bid ask spreads, the current debit to take this position would be 1.75, with a maximum possible profit of 1.25. To realize a 1.00 profit near term, the price would have to drop to 32.50. To take a 1.00 profit at 36, you would have to wait until the day before expiration. On top of that, you have doubled the transaction cost compared to just going long one side or the other. Spreads can pay off nicely if you get the direction right, but I think most of the gunslingers here would not be too happy with how slowly their value evolves. You could look at combinations that have different expiration months instead of the vertical spread (same month expiration) in your example; "calendar" spreads (same strike, different month) and "diagonal" spreads (different month, different strike) take advantage of the faster time decay of the near month, but these still take time to evolve. There is a thread that has grown a bit quiet lately, but has some good discussion on spreads Subject 19444 I see Ken (KFE) has paid us a visit here. He has posted lots of good stuff over there, and elsewhere. Dan