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

CHAPTER 8

R&R and Time Travel for Lon

With the details of their deal wrapped up, and with a few realizations about their trade made along the way, Lon and Shorty hurriedly finished lunch (it was already well past 1:00), agreeing to stay in close touch over the next while.

As Lon drove home that night after work, he rehearsed to himself the deal he had struck with Shorty. Finally arriving after the 40-minute drive, he sought Cass excitedly.

“Look,” he said upon finding her resting in the family room. “I made a great deal with Shorty today.”

“A deal?”

“Yeah, a deal. See, we’ve been talking about the stock market for quite a while, and today we actually made our own deal, our own trade.”

“Okaaaay,” replied Cass apprehensively, not knowing where Lon might be headed with this “trade” thing.

Let’s create a category that will help me keep track of my costs.

“Well, here’s the deal. I recently bought 100 shares of Plum stock at $40 per share, which is about where they’re still trading. Now I think that value is going to go up to around $55 per share. Well, Shorty also owns 100 shares of Plum stock. And we entered a contract with each other: I paid him $5 per share right now for the right to buy his 100 shares at $40 anytime in the next six months. That means if the stock price goes to $55, I can still buy his shares at $40, and if I want to I can then turn around and sell them immediately on the open market for $55! Just think about it: I’ve made $15 per share.”

“Well, I get your point, ...