The following is the OptionBT sighting of    "It Counts".
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Title   :   "It Counts"
Position Description  :
     Position taken   :     December 20,2006
     Six months out,
     Vertical Bull Spread on Calls, Vertical Bear Spread on Puts
     Long the 07 Jun 1225 Calls (1000 cnt), Short the 07 Jun 1350 Calls (1000 cnt)
     Long the 07 Jun 1350 Puts (1015 cnt), Short the 07 Jun 1225 Puts (1000 cnt)
     No Margin required,
     Close on the day of trade December 20,2006 was 1423.53
     Expiration/Settlement    :    June 15,2007 / Settlement = 1534.09

Count   :                     1000 long call options, 1000 short call options,
                                  1015 long puts options, 1000 short puts options
Credit or (Debit)   :     ($12,201,500)
Margin   :                   non required

Results   :                   Net = +$298,500 ... June 2007 Settlement was above 1350.0


Comments   :   "It Counts"

All our lives we have been told, "There is no perfect hedge.".
That is not true of course and the secret is not very well kept.
Here "It Counts" shows us exactly how to create one.

You don't have to be this big to do this, but you do have to get these favorable prices.

With a pair count of 2000, "IC" is able to sneak in the extra 15 uncovered long puts (at a cost of $31.5k) and in this way bias the position toward the down side.

If the SPX stays where it is or moves higher then this $12.2M transaction will yield a paltry $298k or 2.4 percent during the six month period. if the SPX were to move down to around 1300 the position would yield around $370k. Lower than this the position will continue to prosper.Why? Because of those extra uncovered long 15 puts. No matter where the SPX settles in June of 2007, this position will always show a profit if held until cash settlement.

With such a small return (for this large outlay) why bother? There are benefits to this position. The primary of these is that you don't have to run around and try to find someone to buy you out before settlement. Here the kitty will provide the endgame.

Could "IC" just have easily put this juxtaposition of strikes on the high side of the normal?
Well maybe. This position does take advantage of a special quirk in the pricing structure of the Black-Scholes but it is all about favorable prices. With this size of a transaction the prices were no doubt agreed upon.

Like the "GapMan" this position is an example of a borrower and a lender. The lender spends $12.2M and the borrower accepts the money and will have to repay the full amount borrowed plus 2.4 percent at settlement. It is the borrower of the cash who then must take the money and do something with it which will generate a profit greater than the cost of the money over six months.

One might think the lender is the one with the Big Bucks. Actually this is not the case. The borrower, who is receiving the money and shorting the long positions of the lender, has to post margin of $25M just for the 2000 pairs of vertical spreads not including the 15 uncovered short puts. The reality is that the exhange member firms don't have to play by these rules. You can bet the guys in the carpeted office will take notice if you put $25M+ at risk.

This is just a simple business transaction that bypasses all the lender/borrower paper work leaving both parties free to address more interesting issues.

Special Note: Since the data comes from end of day volumes, one might argue that the 15 extra puts could be part of another transaction. No question. Removing them from the discussion will not effect the outcome of the position. Without their cost the position would make even more.


The close of the SPX in June of 2007 left room for "IC" to concede victory, but not by much. He did pocket the $298k and didn't look around to see if there were any witnesses.
We're talking six month money here so let's not be too harsh. There was a $12M outlay to put on this position and for this reason we don't find this course of action to be a recommended procedure.
Even though the return may appear small for such a large dollar outlay, this was an interesting postion and in the end "It Counts".

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