The following is the OptionBT sighting of
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Position taken   :
Position Description   :
Nine Months out,
This is a Time Bandit Spread.
(long) 03Jun1450 Puts
This spread was closed early with two transactions (see description below)
3450 pairs and one extra short put
Credit or (Debit)   :
$ 145,000 (based on 100%)
Comments   :   "Lemonade"
"Lemonade" is a Time Bandit. (A Time Bandit buys a strike in a far
month, sells the "same" strike in a near month with equal count, and does it for a credit.)
His plan, as demonstrated by his original spread position which was taken
on May 02,2002 (SPX Close:1084.56), was
for the market to bottom and move higher. Indeed it did have the appearance of
moving higher, but the next month was filled with further lows.
With spreads of this type, had the market risen, then the original price
spread of $5.00 would have narrowed as the market advanced and produced a
nice profit for the owner.
Further evidence that "Lemonade" favored the upside is
the sale of the extra put. This short put while contributing $34,800 to the
original transaction's credit of $1.7M produced a margin requirement which
given the size of these numbers is negligable.
It was a fifty point decline in the underlying index which triggered an "exit stategy"
that made "Lemonade" a Hall of Fame standout.
On June 18,2002 (SPX Close:1037.11) "Lemonade" bought back 2551 of the 03-Mar-1450 Puts which were short
(including the one extra short put) and sold 2450 of the 03-Jun-1450 Puts that were long.
The net debit for this transaction was $4,805,610.
This left him with 100 more long puts than short puts and a little over $3M in unwanted
out of pocket expenses.
Then two days later on June 20,2002 (SPX Close:1006.29)with the market still in decline,
he harvested the remainder of the spread for a net credit of $3,630,000.
The results of all transactions was +$583,980.
When you stand back and look at it you might think that "Lemonade" was pleased with these
results considering, after all, he had just made half a million dollars in under two months.
I assure you that this is not the case. Had his initial market projection come to fruition
he would have pocketed many times this amount and, more importantly, with little or no stress.
When I first spotted this example my first impression was,
"Sounds pretty good, heads you win big, and tails you put half a million in your pocket.".
Then I took a closer look at the pieces that you "must have" in
place in order to perform these gymnastics and it was then that I realized that "Lemonade"
was both "good" and "lucky".
There were three main keys to "Lemonade's" success:
The "first key" is the "large initial
count" in the opening transaction. This allowed him to split the count during the
second transaction and "buy to close" 100 more puts (which he was short) than the puts which
he "sold to close" (which he was long). This converted his passive bull position into a bear with conviction.
The "second key" was the fact that he had access to a "large amount of cash". This second
transaction cost $4,805,820 which was $3,046,020 more than he had received in the
credit from his original opening position.
The "third key" was the market itself. After the second transaction "Lemonade" was
now totally committed to the down side. There was no avenue of escape. If the market
had turned around and gone higher "Lemonade" would have been really soured.
Fortunately, the market declined on que and allowed "Lemonade"
to end this nightmare in the black.
It is certainly possible to visualize the moment when "Lemonade" realized that it
was time to exit and it was going to cost him $3M to execute his plan which was, by no means,
guaranteed to succeed.
It is also easy to imagine that following the second transaction there were two agonizing
days of waiting and hoping that the market would continue to retreat. Likewise, after
the third transaction and everything had been cleared, I am sure there was relief and rejoicing.
We rejoice also because our BigFoot/Time Bandit has shown us that sometimes when you
have a position that has turned into
"a lemon", you can put in "a lot of sugar" and you can make "Lemonade".
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