27 lines
1.7 KiB
Plaintext
27 lines
1.7 KiB
Plaintext
would have been if a short-term, less expensive August 60 call were the
|
||
long leg of this spread.
|
||
Rolling the Spread
|
||
The July–December spread is different from short-term spreads, however.
|
||
When the Julys expire, the August options will have 29 days until
|
||
expiration. If volatility is still the same, XYZ is still at $60, and the trader’s
|
||
forecast is still neutral, the 29-day August 60 calls can be sold for 1.45. The
|
||
trader can either wait until the Monday after July expiration and then sell
|
||
the August 60s, or when the Julys are offered at 0.05 or 0.10, he can buy the
|
||
Julys and sell the Augusts as a spread. In either case, it is called rolling the
|
||
spread. When the August expires, he can sell the Septembers, and so on.
|
||
The goal is to get a credit month after month. At some point, the
|
||
aggregate credit from the call sales each month is greater than the price
|
||
initially paid for the long leg of the spread, thus eliminating the original net
|
||
debit. Exhibit 11.6 shows how the monthly credits from selling the one-
|
||
month calls aggregate over time.
|
||
EXHIBIT 11.6 A “free” call.
|
||
After July has expired, 1.45 of premium is earned. After August
|
||
expiration, the aggregate increases to 2.90. When the September calls,
|
||
which have 36 days until expiration, are sold, another 1.60 is added to the
|
||
total premium collected. Over three months—assuming the stock price,
|
||
volatility, and the other inputs don’t change—this trader collects a total of
|
||
4.50. That’s 0.50 more than the price originally paid for the December 60
|
||
call leg of the spread.
|
||
At this point, he effectively owns the December call for free. Of course,
|
||
this call isn’t really free; it’s earned. It’s paid for with risk and maybe a few
|
||
sleepless nights. At this point, even if the stock and, consequently, the |