Riskless trade?

[skorpyo]

Guys,

I have a question. Am a bit of a newbie in the options world.
I set up a bear put spread on ACOR 2 days ago.

Buy 100 Jul 36 Puts @ 2.3
Sell 100 Jul 34 Puts @ 2.4

I know a bear put spread is a net debit. However in this instance, this was a net credit. Looking at my risk graph, i see that at maturity my maximum loss is my net credit in this instance. Am i an idiot or is this a free trade? Although the stock closed yesterday at 39, i am up $11,500 dollars on a trade that credited me with $1000 in the first place.

Could the implied volatility difference between the 2 strikes have been so far apart to create this credit? What am i missing?? Thanks.

 

[AngryErik]

Disclaimer - I'm faaaar from a professional trader - just an amater. I could be completely wrong in anything that I say. That said...

You're agreeing to buy shares at a price of $34, and have the option of selling shares for $36.

Your net commission is a credit of $0.10 per share.

The only "risk" that I can see is that you aren't going to get assigned on your short put - this is of course assuming the price is greater than that of your short strike... which at the present it is. It's a minor risk though, because you're in a net credit; you could let your long puts expire and still come out ahead. This would happen so long as the price stays above $34.

The other possibility, that the price will decline (substantially in your case) is moot as you've got the long put to cover yourself out.

Looks like you'll only make $10 per spread (which it looks like you have 10, so $1000), but if the price drops a lot (to $33.99 or lower) would gross about $2.1 per share. Minus commissions of course.

Edit:
Ah, and I just had another thought. Assuming you don't have $34,000 in margin/cash to buy 1000 shares (since it looks like you have 10 bear put spreads) , you may want to check with your brokerage and make sure you don't get your portfolio nuked trying to make up enough cash for the purchase... I know mine would put my account through the shredder if I tried to do that, even if I've got the other half of the spread in a profitable position. This would only be the case if the price were to drop below $34, where you'd get assigned on your short puts.

 

[skorpyo]

Thanks for the reply.

I got out of the position this morning for a credit of $5000 - commissions when the stock was trading a bit over 39. I got filled in about 2-3 minutes.

Been looking in more depth at verticals and it seems that regardless of whether it is a credit or a debit spread, a drop in IV is somewhat beneficial for the position as it moves you closer to your maximum profit faster. It is a negative vega position. The short put must have had very high volatility when filled causing my debit spread to turn into a credit. Although IV has decreased today, since my fill it has actually increased by around 10% so it further confuses me.

With the market moving above my long put and with a slight increase in IV, i wasn't expecting to make more than my initial credit but instead the position ended up being profitable.

In terms of margin and option buying power, these weren't reduced. The only risk outlined before placing the trade was dividend risk which was of course not included in the software's risk graph.

Any other ideas?

 

[Braine]

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