Spread Trading: An Introduction to Trading Options in Nine Simple Steps

CHAPTER 2

Let’s Make a Deal

Lon and Shorty had first met three years earlier while playing on the same company softball team. They (and, just as important, their wives) had hit it off immediately. They went to games together, and often met for lunch. Today, Shorty was saving a spot for Lon in the company cafeteria. He had the market on his mind and wanted to talk about it.

“Hi, Shorty,” Lon greeted.

“Hi, Lon. How’s the market been treatin’ you?” Shorty smiled. He was not one to beat around the bush.

“About the same as always. Some good, some bad, I guess. You know how it goes.”

“Yeah, I do.” Shorty was hoping Lon might have some creative ideas about how to handle the issue of his Plum stock. He was surprised to find out that Lon had also bought 100 shares of the same stock, though really, recent news reports on the company had put Plum on a lot of people’s minds. He was also surprised to find that they, two clever (though novice) investors, had different short-term expectations for the stock. He’d thought his conclusions were obvious.

Lon, as they talked, couldn’t shake his thoughts from the night before. He’d been thinking about this very stock, but his expectations were just the opposite of Shorty’s. Surely this situation had the makings of a deal.

He began formulating a possibility in the back of his mind. I can’t travel through time, but I’m expecting the stock to rise in the next six months, and Shorty is expecting it to fall. What if I could get him to give me a coupon to ...