This SMH Calendar Put Spread Could Pay 3.3 to 1
Bearish play with a target stock price of $156
Strategy has +330% upside potential and 15% undervalued
|Strategy: Long SMH Calendar Put Spread|
|Sell 15-Dec-23 156 Put||1.75|
|Buy 29-Dec-23 156 Put||2.68|
Option Profit Calculator Results for SMH Calendar Spread at 15-Dec-23 Expiration
In this scenario, the optimal stock price for the option strategy would be $156.00 on the date of the first expiration, December 15, 2023. This is equal to the strike price of the options in the spread. Since there is notable downward pressure in both the market and SMH, and the strikes are below the current stock price of $162.07, the spread is taking advantage of the market's bearish bias. If the stock price is $156.00 at expiration, we can benefit from the 15-Dec-23 put, which we sold, expiring worthless, and the option that we are long, the 29-Dec-23 put, will still have time premium built in.
Since we do now know what the exact implied volatility will be on December 15, we can use our historical data to make an educated estimate to help us calculate the value of the 29-Dec-23 option. Applying the median historical implied volatility of 32.1 from similar options, the theoretical value of the put is 4.00 at the date of the 15-Dec-23 expiration. Using the above assumptions gives us a potential upside of +330% for this calendar spread.
SMH Calendar Spread Value vs. Market Price
According to Market Chameleon estimated value, SMH Calendar Spread is trading at a 15% discount to historical benchmark.
If we use historical data to measure how similar spreads in SMH were priced in the market, the 4-year average price was 1.09, with a high mark of 1.86 and a low of 0.35.
Currently, the calendar put spread is bid at 0.81 and offered at 0.93. The midpoint of the spread is 0.87.
If we use 1.09 as our historical fair value benchmark, the current market ask price is at a 15% discount, while the current market midpoint represents a 20% discount.
|Current Price||Historical Values of Similar Spreads|
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