Thursday, September 12, 2013

Suntech Call Spread Trade ($STP)

One interesting way of betting against Suntech would be to short call spreads.

For example, the January 2014 $0.50 call is $0.69 bid, and the $1.50 call same expiry is $0.16.

Shorting a $0.50/$1.50 call spread results in a net credit of $0.69-0.16 which is $0.53. The net credit is the maximum gain; if the spread closed in the money the max net debit would be $0.47.


Steve said...

Be careful selling calls, especially 0.50 strikes with no time premium.

I sold a few, and got early assigned the next day with a forced buy-in. The options market maker clearly doesn't believe STP is worth the paper its printed on.

CP said...

That's strange. Why would anyone pay $0.70 for the $0.50 call with the stock trading at $1.20 and then exercise the call?

Steve said...

I assume the market maker is playing for pennies on a day trade, plus maybe order flow. I sold at $0.50 call for $0.60, and the next day was forced to cover a short at $1.15.

Notice the open interest:
Dec $0.50, 59 contracts
Dec $1.00, 12423 contracts
Jan $0.50, 589 contracts
Jan $1.00, 18552 contracts

All the $0.50s have been cleaned out by early exercises. The market makers know they are toxic, they just buy for the low implied vol and they are out on the first nickel pop.

Steve said...

I should add once the mms own the calls, they can't sell because there aren't any natural buyers.

The only way to get out is to exercise and sell the common shares to retail bag holders.

Steve said...

This is a stock that should have been delisted and cancelled four months ago.

But the commissions and borrow fees are still juicy, so it's found money for Wall St.