/biz/ - Business & Finance

>>54187043
>>54186982
>>54186822
Okay so I did a simulation by hand.
I did +600 KO, -200 PEP, which requires about $35,000 in margin. For Apr 21, I wrote a 52.50C for KO and and 195P for PEP. These are both ITM for the respective options. These are priced at/beyond 2SDs of price movement.
It turns out that writing the OTM option legs will result in a loss, since it caps the profit, so we only use the ITM options.
In a tail risk situation, KO drops 12% and hits 2SDs away. Assigned or not, it eats a huge loss, but PEP's short covers the loss, since it should be moving with it. In this case, you still make $320, after accounting for fees.

The risks are early assignment, the two assets moving against each other (eg KO does a retard rally and PEP falls), even one asset not moving while the other does. This is sort of a contrived example since prices should generally stay within 1SD, especially during a 30-day period. I might actually try this on something with a lower price point.

Bonus: The short/put leg could be constructed with long puts, a long position and/or short calls. Eg, it's doable in a TFSA which means no tax implications. In this example it was a $35k margin with a return of $320, which is 0.9% return in 35 days. Annualized, it's about 9.5% in a naive case. Pretty good starting point before I fuck around with it more