Example 2
A trader, Luke, is studying the following chart for United States Steel Corp.
(X). See Exhibit 17.2 .
EXHIBIT 17.2 United States Steel Corp. daily candles.
Source : Chart courtesy of Livevol® Pro ( www.livevol.com )
This stock is in a steady uptrend, which Luke thinks will continue.
Earnings are out and there are no other expected volatility events on the
horizon. Luke thinks that over the next few weeks, United States Steel can
go from its current price of around $31 a share to about $34. Volatility is
midpriced in this example—not cheap, not expensive.
This scenario is different than the previous one. Luke plans to potentially
hold this trade for a few weeks. So, for Luke, theta is an important concern.
He cares somewhat about volatility, too. He doesn’t necessarily want to be
long it in case it falls; he doesn’t want to be short it in case it rises. He’d
like to spread it off; the lower the vega, the better (positive or negative).
Luke really just wants delta play that he can hold for a few weeks without
all the other greeks getting in the way.
For this trade, Luke would likely want to trade a debit call spread with the
long call somewhat ITM and the short call at the $34 strike. This way, Luke
can start off with nearly no theta or vega. He’ll retain some delta, which
will enable the spread to profit if United States Steel rises and as it
approaches the 34 strike, positive theta will kick in.
This spread is superior to a pure long call because of its optimized greeks.
It’s superior to an OTM bull put spread in its vega position and will likely
produce a higher profit with the strikes structured as such too, as it would
have a bigger delta.