From the presented data, is this a good trade? The answer to this question
is contingent on whether the position John is taking is congruent with his
view of direction and volatility and what the market tells him about these
elements.
John is bullish up to August expiration, and the stock in this example is in
an uptrend. Any rationale for bullishness may come from technical or
fundamental analysis, but techniques for picking direction, for the most
part, are beyond the scope of this book. Buying the lower strike in the
February option gives this trade a more positive delta than a straight
calendar spread would have. The trader’s delta is 0.255, or the equivalent of
about 25.5 shares of Apple. This reflects the trader’s directional view.
The volatility is not as easy to decipher. A specific volatility forecast was
not stated above, but there are a few relevant bits of information that should
be considered, whether or not the trader has a specific view on future
volatility. First, the historical volatility is 28 percent. That’s lower than
either the January or the February calls. That’s not ideal. In a perfect world,
it’s better to buy below historical and sell above. To that point, the February
option that John is buying has a higher volatility than the January he is
selling. Not so good either. Are these volatility observations deal breakers?