Friday, March 9, 2012

The Missing info on Brians $LVS Options Action trade

Brian Stutland just layed out a call spread risk reversal trade for $LVS on Options Action:

Sell:  the Jun 46 put
Buy: the Jun 60/65 call spread

the entire 3leg trade would be for a 10cent credit ($10) per one lot. also for each one lot you need to have $4600 in buying power.

My pet peeve with how they describe what could happen if stock goes down... the "you could get put the stock" type comments. I know air time is tight but i think the OptionsAction crew owes it to the audience to be a little more clear.  Today they implied that if the market corrects and LVS drops below 46 that you will be forced to buy the stock right away. not so. This is a JUNE option... if you do nothing AND the stock is below 46 on JUNE opex then you will be "put" the, your broker will automatically buy the stock for you at $46 ($4600 per one lot)

it is extremely rare for that put option to be exercised early on you especially this far out from the opex even if the stock drops below 46....just watch the 46put "delta"...the closer it gets to 1.00 the more likely they will be exercised on general rule is that if an option delta is above 96-97 then it is time to either close the option / roll to next month.. so this delta will not get near 99 unless the stock drops dramatically lower than 46 and / or you get months of time decay. so i think the options action crew overemphasizes the "you can be put the stock" part of this trade....just adding the comment "at opex" would make it more accurate in my opinion. what doesnt get mentioned is unless the stock really takes off to the upside, you will not realize that full $5 wide spread profit..moves to 65 tomorrow and  you will see a nice gain but you will have to wait till all the way to June opex to see the full profit..which is ok, you might just be looking for a few hundred bucks gain.

also, that $4600 in buying power you have to set aside you will have to keep set aside as long as you have that if stock takes off, buy back the put and let the call spread ride..that way you get your buying power back.

personally would not put on this trade...having to set aside $4600 to make a max of $500 plus having to wait 3+ months to get that $500 is not a good use of $4600 to me... June is 3 full opex' rather use that $4600 in buying power to sell 3 seperate credit put spreads in other names like i have been doing....waiting 3months to make $500 is not my style.

what does the picture have to do with this trade....well...nothing