27 lines
1.9 KiB
Plaintext
27 lines
1.9 KiB
Plaintext
The positive deltas indicate that both positions are bullish, but the outright
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call has a higher delta. Some of the 395 call’s directional sensitivity is lost
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when the 405 call is sold to make a spread. The negative delta of the 405
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call somewhat offsets the positive delta of the 395 call. The spread delta is
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only about 20 percent of the outright call’s delta. But for a trader wanting to
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focus on trading direction, the smaller delta can be a small sacrifice for the
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benefit of significantly reduced theta and vega. Theta spread’s risk is about
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7 percent that of the outright. The spread’s vega risk is also less than 4
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percent that of the outright 395 call. With the bull call spread, a trader can
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spread off much of the exposure to the unwanted risks and maintain a
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disproportionately higher greeks in the wanted exposure (delta).
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These relationships change as the underlying moves higher. Remember,
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at-the-money (ATM) options have the greatest sensitivity to theta and vega.
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With Apple sitting at around the long strike, gamma and vega have their
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greatest positive value, and theta has its most negative value. Exhibit 9.3
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shows the spread greeks given other underlying prices.
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EXHIBIT 9.3 AAPL 395–405 bull call spread.
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As the stock moves higher toward the 405 strike, the 395 call begins to
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move away from being at-the-money, and the 405 call moves toward being
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at-the-money. The at-the-money is the dominant strike when it comes to the
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characteristics of the spread greeks. Note the greeks position when the
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underlying is directly between the two strike prices: The long call has
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ceased to be the dominant influence on these metrics. Both calls influence
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the analytics pretty evenly. The time-decay risk has been entirely spread off.
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The volatility risk is mostly spread off. Gamma remains a minimal concern.
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When the greeks of the two calls balance each other, the result is a
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directional play. |