Skip to main content

Learned something new today


I was analyzing my naked Mar $45 XLE Puts. While looking at the option chain I see that there is two ticker symbols for the $45 Mar strike price. I always assumed that they were separate because one was originally a LEAPS contract and one was the regular near-term expiration that doesn't become a ticker symbol until it's regular calendar cycle begins. So it turns out that this is correct, however, this is what I learned: the LEAPS contracts do not expire on the third Friday of that month, they expire on the last day or that month. So the LEAPS for the same month same strike price have slightly longer maturities and this is why the stay separate ticker symbols. I always wondered why your LEAPS didn't just turn in to the regular calendar cycle contracts once they became available. I thought maybe it was for capital gains reasons because LEAPS are taxed at the short-term rate even if you held it for more than a year.

So attached is a snap shot of the prices today for the two different $45 puts and what got me thinking. If you could effectively middle those spread prices, you sell the put expiring 3/31 for .36 and buy the other that expires 11 days earlier for .27 and take in a credit of .09. Your only risk is being naked for 11 days, but you could always just close both of them out on 3/20 when the first one expires. Looking at today's prices for the Feb expirations gives you an idea of what it would cost to close out with 11 days left, and today's BxA price for the $45 put is .05-.09, so you could get out with a profit. I wonder if you are even allowed to sell to open on the 3/31 expiration. In my case I know I could buy to close that short position, but I think for just this reason of possible arbitrage that you're not allowed to enter opening positions in LEAPS contracts when they are technically not longer LEAPS. Just thought it was a bit interesting, but you would probably never be able to get any significant volume through on such a trade anyway as the market maker would know what you're doing and just keep the spreads such that even if you paid the bid and ask to enter the trade you couldn't make a profit. If you see the prices posted above there is a .01 differential if you paid the bid and ask, after commish you get nothing and still have 11 days risk.

Comments

Post a Comment

Popular posts from this blog

WOW! I think that sums it up

Many of you have been reading this blog may have noticed that my blogging frequency has increased over the past few weeks as I got short the market. As you can imagine I am down money since getting short the market, this is the time when most people pull away from posting. But my goal is to stay active and involved and show you that trading is not always rainbows and butterflies. It is times like these that the things I have been sharing over the past couple of weeks are so important. You need to trade small relative to your account. I have a decent short position in the market and my portfolios are set up to make some awesome returns if we finally turn lower. But something I would like to point out is that my account is 70% Cash.  I learned a long time ago how important it is to live by the rules you preach. Because of my discipline I am able to continue to hold my positions, I have time and capital on my side. I can't stress enough how important it is not to get to big....
Post a Comment
Read more

Stay Small, Stay Out of Trouble

To expand on my post from yesterday about patience. I want to talk about a very important element that allows patience in a position, and that is staying small. If you trade too big RELATIVE to your personal account size, you are likely to be forced to exit the trade before the trade works in your favor. Many trades myself included have all experienced the pains of trading a position way too large given our account size. There is this predisposition out there that the only way you are going to make money in the financial markets is if you are trading 10 lots of options and 1000 shares of stock at the time. This is not the case, and if this is your mentality you will likely ensure yourself trouble. We have all read the stories of traders blowing up their account. I personally think a good rule of thumb is to not risk more than 5% of your account value on any one position. Good Luck Trading! In The Money Trades And 1 favor that we ask:  If you like the hard work w...
Post a Comment
Read more
more good news from FXStreet : Tom Fitzpatrick, senior technical analyst at Citibank in New York. Monday, July 15, 2002 "Parity is a psychological, not a technical level...and whether we pause around parity or not, we are likely to see significant further dollar losses...Our initial target is $1.03 to $1.0450. If that level is taken out, it actually casts a question mark against the whole of the dollar's rally of the last seven years, and could open up a full-blown bear market for the dollar." Julian Jessop, chief European economist at Standard Chartered Bank. Monday, July 15, 2002 "The dollar is under pressure from everything from economic problems to asset reallocation away from the U.S. and corporate accounting problems. It's difficult to see any positive factor for the dollar at the moment. The root of the problem is the U.S. current account deficit. If the U.S. doesn't have to attract an enormous amount of foreign capital, people wouldn't have to wor...
Post a Comment
Read more