A rally in the stock market has taken a toll on our Cigna (CI) bear put spread, but even with the recent gain in stock price, we’re still at breakeven in the trade. After a nice decline in stock price, Cigna shares are not retracing some of these losses. However, we still believe that the stock will move to our target of $40 before we need to exit the trade due to time. Below is the week-to-week data for this mock bear put spread:

Bear Put Spread
6/3/2003
Cigna (CI) @ 51.36
Buy 1 Oct 50 Put @ 4.40  IV = 39
Sell 1 Oct 40 Put @ 1.20  IV = 46
Initial Debit = 3.20 or $320
Max Risk = $320
Max Reward = $680
Breakeven = 46.80

6/10/2003
Cigna (CI) @ 49.66
1 Oct 50 Put @ 4.60 (bid) IV = 41
1 Oct 40 Put @ 1.20 (ask) IV = 44
Initial Debit = 3.20 or $320
Current Credit to close = 3.40
Profit = $0.20

6/17/2003
Cigna (CI) @ 48.64
1 Oct 50 Put @ 5.10 (bid) IV = 42
1 Oct 40 Put @ 1.60 (ask) IV = 47
Initial Debit = 3.20 or $320
Current Credit to close = 3.50
Profit = $0.30 or $30 per spread

6/24/2003
Cigna (CI) @ 47.75
1 Oct 50 Put @ 5.20 (bid) IV = 39
1 Oct 40 Put @ 1.50 (ask) IV = 45
Initial Debit = 3.20 or $320
Current Credit to close = 3.70
Profit = $0.50 or $50 per spread

7/01/2003
Cigna (CI) @ 46.89
1 Oct 50 Put @ 5.40 (bid) IV = 37.7
1 Oct 40 Put @ 1.40 (ask) IV = 42.0
Initial Debit = 3.20 or $320
Current Credit to close = 4.00
Profit = $0.80 or $80 per spread

7/08/2003
Cigna (CI) @ 48.66
1 Oct 50 Put @ 4.20 (bid) IV = 36.9
1 Oct 40 Put @ 0.95 (ask) IV = 41.9
Initial Debit = 3.20 or $320
Current Credit to close = 3.25
Profit = $0.05 or $5 per spread
Delta = -34.7
Gamma = 2.0349
Vega = $4.21
Theta = $-0.59

Though it would be nice if a bearish play like this moved straight down and didn’t look back, this isn’t the way stocks work. However, there is nothing that tells us that Cigna shares are now going to suddenly move sharply higher. Volume on the advance has been moderate at best and it has occurred while the broader market has made large gains. The stock also found support near a prior support level at $46. However, the major area of support is down at $40, where we believe this stock will go in the next few months. Below is a risk graph of this trade through the close of trading on July 8.

Figure 1: Risk Graph of Cigna Trade

It’s only a coincidence that the breakeven point for this trade happens to be right where short-term support is. Using Advanced Get, the projection for this stock is still well below $40, but the time frame for this move is somewhere between August and November. We only need Cigna to move below $46.80 by expiration to achieve a profit.

A positive sign for our trade is the fact that the put/call ratio is extremely low right now. It currently sits at 0.204 with an average reading of 0.886. What this means is that traders are bullish on the stock and this is bearish in nature. When too many traders are bullish, it often results in lower prices as the bulls have already done their buying.

Notice on the most recent data above that I have included the values of the various “greeks.” Since we talked about these last week, I want to track them each week so we can see how they change over time. Let’s briefly review what these mean.

Delta - The change in the trade value based on a dollar move in the underlying security.
Gamma - The change in Delta with a one point move in the underlying security.
Vega - The dollar change in the trade based on a one-point move in implied volatility.
Theta - The loss per day for the trade due to time decay.

These greeks can be useful in telling us how a trade is going to react given various inputs. Many traders feel the greeks are difficult to understand, but they aren’t if you just review them occasionally. After a while, you’ll be able to glance at them and get a feel for how the trade will react.

Since this mock trade is long term in nature, we are going to start another series of articles next week, though we will continue to update this trade. Please feel free to ask any questions or make any comments on my forum. Any suggestions for new articles would be appreciated also.

To search for previous articles in this series, please click here.


Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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