Well Don Winton says…
ZAP is the guy who got me into my first trade, my first prop desk, my first job in NY managing traders and now I am thrilled to have him as my new business partner in The ReThink Group/TraderPsyches & SportPsyches. More importantly for our purposes here though, he knows options …well like I know … (hmmm… maybe I don’t know anything as well as he knows options).
In any event, new dilemma – he wants me to buy a call spread vs. sell a put spread. Reasons being 1) I won’t get the prices I need on such an in the money put spread because who is going to take the other side? (Back to the human question – even in options!)
Good thing this is a June trade. It is taking longer to figure out (or maybe just for me to understand it) than I thought! I think I need my margarita drinking partner Bill, my business partner Don and our thinkorswim analytics all in the same room. Geez – I NEVER liked group trades!
Oh, I understand that much and have sold tons of puts for credit but never ITM. I guess I’m just used to selling OTM, @ that 30-50% probability of expiring ITM range , always allowing a flat market to give me some profits, always going hitting a single or a double.
Yours, to me, looks like it’d be a grand slam.
Let’s walk through the elements… if I sell a put… I sell the right to someone else to sell the “stock” at that price. So if I sell a 130 put …. someone out there has the right to “put” the 130 June SPY put to “someone”…. or someone has the right to sell SPY at 130 regardless of where it is trading.
What I have at that point is whatever premium I took in for selling that.
What happens next …. ?
Let’s say the market goes to 128?
132?
What happens next?
ITM put spread selling on a market you are bullish about … I’m very confused as to what this trade is.
I was a CBOE market maker also (23 years).
If there is really a 5 cent differential, then I absolutely agree that you should save that 5 cents.
I just know that if I’m willing to pay $4.20 (as a market maker) for that ITM put spread, then I’d be even more eager to sell the corresponding call spread @ $0.80. The P/L is equivalent an I get to save a bit on interest.
Thanks
http://blog.mdwoptions.com
Well he was on the CBOE floor for a lot of years… and he did make a lot of money… so without calling him, yes I am sure he knows that. In fact, even in my neophyte state I know that.
I think the issue is however that on the ITM puts the bid-ask spread is wider… and therefore my actual fill on the trade will have more play in it than the fill on an OTM call spread.
In fact, using thinkorswim’s “thinkback” facility it looks to be about a 5 cent differential. Granted that only amounts to about $50 on the total trade but the call spread plays out with $180 risk so 50 smackaroes is relevant.
But I will be happy to transcribe his reaction when I get him on the phone…
This so-called options expert is wrong.
Any market maker who would take the other side of your call spread would take the other side of the put spread.
The positions are equivalent. Doesn’t your buddy know that?