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What is wrong with the following trade? Shows enormous gain. Please help!What is wrong with the following trade? Shows enormous gain. Please help!
Agile cell said: "To all stock/options investment gurus,
I wrote a simple program that does some analysis using some pre-defined strategies for a given security and the associated options. One of the very interesting trades proposed by my program is as follows:
Security: Ebay
Current Price: 33.69
Assumption - Till Jan08 price will be between 0.7 * 33.69 and 2 * 33.69
Trades are:
a.. Collar = buy security, sell call, buy put
b.. VerticalcallSpread = buy call, sell call
c.. VerticalputSpread = buy put, sell put
Numbers in parenthesis denote the option price and option premium (All premiums are conservation meaning in case of a buy trade, premium is the asking price, in case of sell trade, premium is the bidding price)
Is there anything wrong with this? I am sure that is the case, although I am unable to pin-point any mistake. All the computations work out well.
a.. Leg1 - Collar(call sp,call prem,put sp,put prem)=(1750, 1700, 1750, 20)
b.. Leg2 - VerticalcallSpread(bcall sp,bcall prem,scallsp ,scallp prem)=(5500, 25, 4000, 215)
c.. Leg 3 - VerticalputSpread(bputsp,bputprem,sput sp,sput prem)=(4000, 730, 5500, 2120)
Table of returns is as follows:
Initial Investment: 108
[COLOR="Blue"]Projected Money Gains Gains%
Price In
20 250 142 (131.4814814814815)
22 250 142 (131.4814814814815)
24 250 142 (131.4814814814815)
27 250 142 (131.4814814814815)
29 250 142 (131.4814814814815)
31 250 142 (131.4814814814815)
34 250 142 (131.4814814814815)
36 250 142 (131.4814814814815)
39 250 142 (131.4814814814815)
41 250 142 (131.4814814814815)
43 250 142 (131.4814814814815)
46 250 142 (131.4814814814815)
48 250 142 (131.4814814814815)
50 250 142 (131.4814814814815)
53 250 142 (131.4814814814815)
55 250 142 (131.4814814814815)
57 250 142 (131.4814814814815)
60 250 142 (131.4814814814815)
62 250 142 (131.4814814814815)
64 250 142 (131.4814814814815)
67 250 142 (131.4814814814815)
[/COLOR]All these numbers do not take commissions into account. But commissions can mostly be offset by increasing the number of option units in the transaction.
What is wrong with this? Can anyone please help me out?
Thanks,"