We have done some research on this…in the webinar the other night Mike pointed out how Kurt did such a good job detailing in the Blueprint how the put option would not lose at a 1:1 ratio as the stock moved up in price. When I set up my initial RPM’s, my stock has a delta of 1 and my put may have a delta of around -.70. If the stock moves up 1 point, I still will have a positive $0.30 gain on the position.
If I purchase an ITM long call instead of the stock, I am now delta opposed…not delta neutral, delta opposed. My long call will have a delta of 0.70 and my put will have a delta around -.70. If the stock moves up or down within the ranges of the two strike prices, I gain nothing. Although it seems that buying an ITM call would lower your cost and be a greater benefit, it is a completely different trade, similar to a long strangle where both options are ITM, meaning you need a very large move to realize any profit.
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.
This analysis is not correct. In the case of the underlying moving up, the ITM LEAP’s delta will also increase from a 70 to something higher while the married puts 70 delta will decrease. Likewise the opposite will occur if the underlying moves down. The only real difference is the additional cost of the extrinsic value of the LEAP vs the stock……this assumes you plan to close out the trade well before the LEAP expires. It would be interesting to see the number of contracts it would take to establish when it would be more advantageous to use LEAPs vs underlying for a given amount of capital.
Hi Chuck!
The analysis is correct, in the sense that I was referring to the deltas at the time of entry. Both positions are going to adjust as the stock moves. The Gamma will dictate (in theory) how much the deltas of each option will change as the stock moves. This is difficult to use in an analysis, as the Delta and Gamma are always changing as the market moves or does not move.
If there is a sudden spike in the stock, it is possible that the change in Delta and Gamma may be more favorable for the ITM Long Call + ITM Long Put over the Married Put position, but the move has to be significant.
Let’s look at one of Kurt’s recent Plain Vanilla Trades:
11/24/2009
Buy 100 shares CHKP @ $33.01 (delta of 1)
Buy 1 July 35 Put @ $ 3.99 (delta of -0.60, gamma of 0.06)
Total Invested $37.00
Guaranteed Exit $35.00
Total At Risk $ 2.00
If CHKP were to move up 1 point, we would have a positive gain of $0.40 (stock goes up $1, put drops $0.60). The Delta of the Put option would then adjust (theoretically) to -0.54. As the stock moves up another point, we would gain $0.46 on the position. The Put Delta (and the Gamma) would adjust as well.
Now, let’s compare this to an In-the-Money Long Strangle on CHKP:
11/24/2009 – CHKP @ $33.00
Buy 1 July 35 Put @ $3.99 (Delta of -0.60, Gamma of 0.06)
Buy 1 July 30 Call @ $4.70 (Delta of 0.72, Gamma of 0.05)
Total Invested $8.67
Max Risk = $3.69, or 42.5% (If stock is between 30-35 on exp)
If CHKP moves up 1 point, we would expect a gain of $0.12 on the position – gain $0.72 on the Call, lose $0.60 on the Put. The Call Delta would adjust (theoretically) to 0.77, the Put Delta would adjust to -0.54. If CHKP gains another point, we would gain $0.23 on the position.
The monetary gain values for the ITM Long Strangle are lower than the monetary gain seen with the Married Put. Until the stock has a significant upward move where the Long Call would have a delta of 1, the Married Put position will have a larger delta gain for each point the stock moves up.
Yes, I am using the term ‘Monetary Gain’. The ITM Long Strangle is a leveraged position, therefore the percentage gains might be higher…but notice that the potential percentage loss on the Strangle is also much higher. The Strangle is at risk for 42.5% of the initial invested capital. Even if you only trade one or two contracts, you can not afford to suffer 40% losses in your account. That is the whole premise of Kurt’s RadioActive Trading methodology: To teach others how to limit their risk and not place wagers on over-leveraged positions that can wipe out portfolios over time.
By the way, right now CHKP is trading at $33.11. The July 35 Put is trading at $3.80, and the Long Call is trading at $4.70.
The Married Put position has a loss of $0.09 per share, or 0.2%. The ITM Long Strangle position has a loss of $0.19 per share, or 2.1%.
I also have an example of a RadioActive Married Put vs. ITM Long Strangle position on NEM where the stock moved up $2.50 after both trades were opened. The Married Put position could have been liquidated for a gain of $0.80, or 1.6%, but the ITM Long Strangle would have had a loss -$1.35, or 10.5%.
If you would like to see the specifics of that transaction, please let me know!
Sincerely,
Michael Chupka
Director Of Options Education
http://www.poweropt.com/
I think both of you have it half right and may be missing one key ingredient. It may just be income method number 11. The reason mike is right because of the dynamic state of the market and delta and gamma are moving targets. Chuck is partly correct because there will be price movment that may be favorable. The solution. By using the CBOE option calculator u can get more precise reads on delta. Now the greek no one talks about is good old father time or theta. I created a synthetic position by doing the following
MSFT BTO 12.5 call jan 2013 +2225
MSFT BTO 37.5 put Jan 2012 -1550
MSFT STO 32.5 put Jan 2012 +1450
These are year to date p and L numbers from think or swim for a position held for just under 30 days.
The combination call and put at the same strike price is a
True synthetic. The secret to this one is I cheated father time and my delta on the position 2 positive and delta is 99 net between the three which is nearly a riskless trade on the down side and infinite profit on the upside. The rules to this one are large cap stocks with lots of open interest and volume on contracts this relies on some herd instincts but it has proven effective. I have done this with bank of america as well. The Blueprint is dead on. I do the same thing that the blue print does with options and the reason it works is because like you all stated (kurt mike ernie)i am not looking for extreme leverage i look for ways to reduce risk and increase capital .
The position while not having a call and put bought at the same strike price and sold at same strike price Delta will be + 1 throughout the trade hence solving the issue of the delta needing to remain above 1. Best part you can still trade radioactively and introduce a management technich namely IM# 1. If the market moves against the put is moving positively and your short calls risk go down