Long ratio put spread versus call strategy for ABC company
Current market price:$639, view: moderately bearish
Buy 2 February 630 Puts@ 35.00
Sell 1 February 660 Put@ 52.00
Sell 2 February 690 Calls@ 13.00
Breakeven 1: $608
Breakeven 2: $652
Breakeven 3: $694
Graph of the payoff profile of this strategy is given below:
Below $608 : Unlimited profit potential
Between $608 to $652 : Loss (maximum loss of $22 at $630 level)
Between $652 to $694: Profit(maximum profit of $8 between $660 and $690)
Above $694: Unlimited Loss potential
Now if we analyze the above strategy with option strategy analyzer, let us see what we get
Now you will notice that maximum profits and losses figures given in Part(1) do not match with the profits and losses figures given by the option strategy analyzer at different price levels of stock of ABC company. Why?
In my opinion, Option strategy analyzer considers the squaring off the option trades at the time of expiration while Option strategy given in Part(1) considers exercising of the options at those breakeven points at the time of expiration. Is that correct?
Now, which action is profitable 1)to square off the option trade or 2)exercise the option by you or counter-party at the expiry of 30 days time period as the case may be.