Replies to post #71655 on Zeev's Turnips Patch-No Politics (ZEEV)

[mlsoft]

alohamart...

You are trying to put a textbook definition on an unusual trade, in my opinion, and the depth of the "in the money" strikes used means you have to look at it differently. Think about the max gain definition - his max gain would be whatever the excess number of 45 puts he bought (if any) went down and the rest of the spread would nullify each other all the way down to zero. The risk is zero as long as he did not let the Q's get high enough to regain a time premium on the 45's before expiration.

I still believe that the whole intent of the spread is to lift the lower leg at some point in the future when the market appears to have hit a bottom as I explained in an earlier post (#msg-733084). That would give him an effective long position in the Q's with a zero cost basis while drawing interest the whole way. Any additional 45 puts would appear to be a simple bear bet with someone else's money.

Just my opinion, though.

mlsoft

[hedger]

Hi Aloha
Based on your explanation, I agree that the excess puts (~8000) were most likely placed by the same trader.
Yes, you could call this a put ratio backspread but not in the traditional sense. These spreads typically follow ratio rules (# of higher strike/# of lower strikes should not exceed .67 in this case)ie: 1 to 2 or 2 to 3 qualify. However in this case the ratio would be ~102/110 or ~.93 and, therefore, I do not consider this a true ratio spread.
It is easier for me view this in terms of two trades ( a long put and a bull put spread ). Regardless of what you call this, the overall profit/loss profile is the same in either case.
I believe this trader took the credit from the bull put spread and financed the long put. In effect, I believe this trader is betting on a nearer term drop in the QQQ (long put)with little or no risk in his/her spread, as this trade is so far out that the time premium will not be affected. 8000 long puts with no cash outlay is great provided the the QQQ goes lower.
All of the above is pure speculation as I have no assurance that this position was taken.