CPN Update: "YICH!" spread almost doubles...

To date, the yiiccch spread (short 1 CPN Feb 7.50 put, long two CPN April 7.50 put's - opened at .50 Feb bid and rampant 1.75 April prints) has made 1.50 (before commissions), which is more than any naked short put trade could have made, entered at the same time using the same amount of capital, even if you tied up that capital until expiration, and they expired worthless.


Now, as to the exit, blah, any theoretical profits will surely evaporate.


Could the yiiccch spread - with all its obfuscation - possibly have done any better? CPN is down almost a third, and yet the short Feb puts expired worthless.


eLROY

eLROY,

If you think this was a good trade because it made money you are mistaken.I stand by my original statements.There was no vig in selling the puts for 50 cents.Like I said if you did 50 spreads ,just buy less of the puts outright and forget the credit.You realize you might have been assigned the feb puts...and then you would be long the stradddle.but regardless I know you and you would be buying stock to hedge your naked long put position.YICCHHHH...big deal you got lucky,still a lousy option play.

What you were recommending, by selling puts, was a long stock delta play pure and simple. Because you basically said you wouldn't attempt to dynamically replicate, because you expected to get killed if you tried. Meaning, from your point of view, vega was a bargain.


Or, if you were saying someone else would have an easy job of replicating, and would buy the calls back from you for cheaper, I counter that that person would have an easy time replicating in retrospect, but a difficult time knowing in advance he would have an easy time hedging.


So if you know you can't hedge but he could, only he can't hedge because he doesn't know to try, then you are saying vega is correct, because it's too expensive to guess whether you can hedge, unless you expect his knowledge to change. But it seems improbable that his knowledge would change that much short of you being presented with a chance to replicate painlessly.


So if you are taking a loss on short vega, you must be long long delta, or gamma, or whatever. You just can't say "vega is too high but I can't replicate" because there is no way for you to reel it in without replicating or selling to someone who thinks he can. So you are essentially betting the stock will go sideways - meaning you could hedge.


So to not hedge is to buy stock, meaning you made a directional bet, as did I, only you were wrong on direction and I was right. I was also right about the rate of change downward. You said the idea that it would go down gradually was ridiculous, and yet that is exactly what happened. Which is also odd, because I thought you were the one selling vega!


eLROY

Buy selling a put you have in effect sold vega, but by not hedging you are also long delta. If you want to do a vol play but don't want to hedge, you can sell a straddle and start delta neutral. For short dated options, its mostly gamma anyways so if you want a pure vega play you might sell an ATM straddle and a bunch of strangles at different strikes.


But if you don't want to hedge, then selling a straddle gives you range play and eliminates the directional element in being short a put and long delta.