Trade #1- SNAP
We entered into a 1×2 put spread in this stock. The ideal scenario would be for the stock to land at the short strike price of 11/share. Anything below 11/share and we will end up buying 100 shares of the stock but at a steep discount. Lets review how that works.
Bought 1 contract of the 13.00 strike put
Sold 2 contracts of the 11.00 strike put
Debit paid = 0.33 for the spread
The 11.00 strike puts may get exercised early making us long 200 shares of stock. However, at expiration our 13.00 strike put will auto exercise as well. So, we don’t need to do anything to our trade at all and at most we will end up owning 100 shares of stock at expiration. We could tell our broker to exercise it early but that is not necessary and actually eliminates some potential.
Here is the math breakdown:
You sell 100 shares at 13.00/share = $1,300 coming in
You buy 200 shares at 11.00/share = $2,200 going out
We paid 0.33 for the spread = $33 going out
The 100 shares sold and 100 of the shares bought offset over expiration weekend, leaving us long 100 shares at a cost of 933.00 total or a 9.33 cost basis in the stock (2,200 + 33 – 1,300 = -933 total paid).We don’t need to do anything with our 1×2 put spread even if the short puts are exercised early and we will end up owning 100 shares of SNAP stock at a 9.33 cost basis worst case scenario. Right now it is slightly below that price so just a little bit under our cost basis.
Trade #2 – APA
We have short puts in APA that are ITM currently. If the stock finishes below the put strike, we will buy 100 share of that stock. Since we sold the 30.00 strike put and got paid +2.20 credit, our cost basis would be 27.80/share.