Price divergence on C still here today. The potential gain per share has dropped to $0.73 as compared to yesterday's $0.90.Today the Broker has 1.3M C shares available for shorts. Gone ahead to create a small position on this.
AVERAGE PRICE
Short Sell 2,000 C at $3.75
Sell 20x Jun-PUT-Strike-$5 at $2.46
Buy 20x Jun-CALL-Strike-$5 at $0.48
Net cash collected is $5.73 ( i.e. 3.75 + 2.46 - 0.48 ) per share.
If no major events occur, by expiry Jun we will buy back C share at $5 to cover back the Shorts and gain a net $0.73 profit per share. It's like converting the Share (sell at $5.73) into Option (to buy back share at $5.00), a reversion conversion.
For those people who own C shares, it is easier as they need not Short Sell but just to sell their C shares. And by expiry June, they can get back their C share at $5 and keep the $0.73 per share profit.
A) BY EXPIRY JUNE - OK
1) if C > $5, we exercise our CALL option to buy C at $5 to cover the Short Sell. The PUT option expires worthless.
2) if C < $5, we are oblighted by the sold PUT & assigned the C shares at $5. The CALL option expires worthless.
3) if C = $5, assign or exercise price is same as market price. Likely both options expire worthless and we buy C from open market to cover the Short Sell.
B) OPEN POSITIONS MANAGEMENT FROM NOW TILL EXPIRY JUNE
1. If C > $5, no action needed. The CALL option provided us the right to buy C at $5. The PUT is out of money and will not be assigned. OK.
2. If C < $5 and the PUT get assigned early, we pay $5 for C shares. The CALL will still have some time value e.g. $0.10 or $0.20. So net gain will be more than original target of $0.73. OK.
3. If C is at $5, no action needed. OK.
4. If broker requests us to return C shares early ( not sure whether they have this right or not ).
a) If C is > $5, we exercise our option at $5 and return C share to broker. We Buy back the PUT position which by now will be very cheap. So will be in the money but slightly less than $0.73. OK.
b) If C is < $5 but > $3.75, we need to buy from market at less than $5 (additional saving) and return to broker to cover Shorts. The CALL will have increase in value and the PUT reduce in value. We will Sell the CALL options and Buy back the PUT options. So end result is we will make more than original target of $0.73. OK.
c) If C is < $3.75, we need to buy from market at less than $3.75 (additional saving) and return to broker to cover Shorts. The PUT when bought are in-the-money PUT, so as the share price dropped, likely the PUT will increase in the same amount or slightly lower (assume volatility about the same). The cheaper amount we pay for buying back the shares from open market, can offset the cost increase to Buy back the PUT. The CALL price (bought at $0.48) will reduce. So net profit may be slightly less than the targeted $0.73. OK.
d) If C is = $5, we buy from open market to cover the Shorts. Then Sell the CALL and Buy back the PUT. The price of the CALL should be about equal to the price of PUT. OK.
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