20 lines
1.3 KiB
Plaintext
20 lines
1.3 KiB
Plaintext
Making the Most of Your Options
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The trader from the previous example had a time-spread alternative to the
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diagonal: John could have simply bought a traditional time spread at the
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420 strike. Recall that calendars reap the maximum reward when they are at
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the shared strike price at expiration of the short-term option. Why would he
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choose one over the other?
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The diagonal in that example uses a lower-strike call in the February than
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a straight 420 calendar spread and therefore has a higher delta, but it costs
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more. Gamma, theta, and vega may be slightly lower with the in-the-money
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call, depending on how far from the strike price the ITM call is and how
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much time until expiration it has. These, however, are less relevant
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differences.
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The delta of the February 400 call is about 0.57. The February 420 call,
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however, has only a 0.39 delta. The 0.18 delta difference between the calls
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means the position delta of the time spread will be only about 0.07 instead
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of about 0.25 of the diagonal—a big difference. But the trade-off for lower
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delta is that the February 420 call can be bought for 12.15. That means a
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lower debit paid—that means less at risk. Conversely, though there is
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greater risk with the diagonal, the bigger delta provides a bigger payoff if
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the trader is right. |