34 lines
2.3 KiB
Plaintext
34 lines
2.3 KiB
Plaintext
As AAPL continues to move closer to the 405-strike, it becomes the at-
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the-money option, with the dominant greeks. The gamma, theta, and vega
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of the 405 call outweigh those of the ITM 395 call. Vega is more negative.
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Positive theta now benefits the trade. The net gamma of the spread has
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turned negative. Because of the negative gamma, the delta has become
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smaller than it was when the stock was at $400. This means that the benefit
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of subsequent upward moves in the stock begins to wane. Recall that there
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is a maximum profit threshold with a vertical spread. As the stock rises
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beyond $405, negative gamma makes the delta smaller and time decay
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becomes less beneficial. But at this point, the delta has done its work for the
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trader who bought this spread when the stock was trading around $395. The
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average delta on a move in the stock from $395 to $405 is about 0.10 in this
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case.
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When the stock is at the 405 strike, the characteristics of the trade are
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much different than they are when the stock is at the 395 strike. Instead of
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needing movement upward in the direction of the delta to combat the time
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decay of the long calls, the position can now sit tight at the short strike and
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reap the benefits of option decay. The key with this spread, and with all
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vertical spreads, is that the stock needs to move in the direction of the delta
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to the short strike.
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Strengths and Limitations
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There are many instances when a bull call spread is superior to other bullish
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strategies, such as a long call, and there are times when it isn’t. Traders
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must consider both price and time.
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A bull call spread will always be cheaper than the outright call purchase.
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That’s because the cost of the long-call portion of the spread is partially
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offset by the premium of the higher-strike short call. Spending less for the
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same exposure is always a better choice, but the exposure of the vertical is
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not exactly the same as that of the long call. The most obvious trade-off is
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the fact that profit is limited. For smaller moves—up to the price of the
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short strike—vertical spreads tend to be better trades than outright call
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purchases. Beyond the strike? Not so much.
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But time is a trade-off, too. There have been countless times that I have
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talked with new traders who bought a call because they thought the stock |