44 lines
2.7 KiB
Plaintext
44 lines
2.7 KiB
Plaintext
170 Part II: Call Option Strategies
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When a spread order is entered, the options being bought and sold must be
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specified. Two other items must be specified as well: the price at which the spread is
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to be executed, and whether that price is a credit or a debit. If the total price of the
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spread results in a cash inflow to the spread strategist, the spread is a credit spread.
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This merely means that the sell side of the spread brings in a higher price than is paid
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for the buy side of the spread. If the reverse is true - that is, there is a cash outflow
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from the spread transaction - the spread is said to be a debit spread. This means that
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the buy side of the spread costs more than is received from the sell side. It is also
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common to refer to the purchased side of the spread as the long side and to refer to
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the written side of the spread as the short side.
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The price at which a certain spread can be executed is generally not the differ
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ence between the last sale prices of the two options involved in the spread.
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Example: An investor wants to buy an XYZ October 30 and simultaneously sell an
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XYZ October 35 call. If the last sale price of the October 30 was 4 points and the last
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sale price of the October 35 was 2 points, it does not necessarily mean that the spread
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could be done for a 2-point debit (the difference in the last sale prices). In fact, the
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only way to detennine the market price for a spread transaction is to know what the
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bid and asked prices of the options involved are. Suppose the following quotes are
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available on these two calls:
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October 30 call
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October 35 call
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Bid
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37/s
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F/s
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Asked
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41/s
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2
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Lost Sole
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4
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2
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Since the spread in question involves buying the October 30 call and selling the
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October 35, the spreader will, at market, have to pay 41/s for the October 30 ( the asked
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or offering quote) and will receive only F/s (the bid quote) for the October 35. This
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results in a debit of 2¼ points, significantly more than the 2-point difference in the
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last sale prices. Of course, one is free to specify any price he wants for any type of
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transaction. One might enter this spread order at a 21/s-point debit and could have a
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reasonable chance of having the order filled if the floor broker can do better than the
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bid side on the October 35 or better than the offering side on the October 30.
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The point to be learned here is that one cannot assume that last sale prices are
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indicative of the price at which a spread transaction can be executed. This makes
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computer analysis of spread transactions via closing price data somewhat difficult.
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Some computer data services offer (generally at a higher cost) closing bid and asked
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prices as well as closing sale prices. If a strategist is forced to operate with closing |