Risk Calculations wonky?

AngryErik

Junior member
13 0
Hi there... looking at the Blackberry stock on the TSX, with the present values:

BB SEP 20 '13 $22 PUT has a bid of $8.85.
BB SEP 20 '13 $10 CALL has a bid of $5.45.

Position would be to Short 1:1 a CALl and a PUT. (Short Gut spread)

With the closing price at expiration inside the $10-$22 price range, I can see that I'm buying shares for $13.15 with the PUT, and selling them for $15.45 with the CALL.

With the price above $22, I'm shorting 100 shares at $10, but collecting $14.30 in premiums, which would mean I wouldn't start losing money on the up-side until $24.30+.. granted if they do well it could easily explode past this to $30 or even $60 in an extreme case.

With the price below $10, I'm buying shares for $13.15, but collecting $14.30 in premiums which means that even at $0 a share I'd still be making money.

Is my risk analysis right? Is there really only a dramatic upside risk?
 
Last edited:

AngryErik

Junior member
13 0
With the price below $10, I'm buying shares for $13.15, but collecting $14.30 in premiums which means that even at $0 a share I'd still be making money.

Ah, I see the error in my calculations. I'm double-dipping on the PUT premiums for the downside risk. I'd be buying the shares for $22, and collecting the premiums of $14.30, for a downside BEP of $7.70.
 
 
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