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