26 lines
1.8 KiB
Plaintext
26 lines
1.8 KiB
Plaintext
EXHIBIT 11.3 Bed Bath & Beyond January–February 57.50 call calendar.
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A small and steady rise in the stock price with enough time to collect
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theta is the recipe for success in this trade. As time passes, delta will flatten
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out if Bed Bath & Beyond is still right at-the-money. The delta of the
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January call that Richard is short will move closer to exactly −0.50. The
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February call delta moves toward exactly +0.50.
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Gamma and theta will both rise if Bed Bath & Beyond stays around the
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strike. As expiration approaches, there is greater risk if there is movement
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and greater reward if there is not.
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Vega is positive because the long-term option with the higher vega is the
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long leg of the spread. When trading calendars for income, implied
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volatility (IV) must be considered as a possible threat. Because it is
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Richard’s objective to profit from Bed Bath & Beyond being at $57.50 at
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expiration, he will try to avoid vega risk by checking that the implied
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volatility of the February call is in the lower third of the 12-month range.
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He will also determine if there are any impending events that could cause
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IV to change. The less likely IV is to drop, the better.
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If there is an increase in IV, that may benefit the profitability of the trade.
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But a rise in IV is not really a desired outcome for two reasons. First, a rise
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in IV is often more pronounced in the front month than in the months
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farther out. If this happens, Richard can lose more on the short call than he
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makes on the long call. Second, a rise in IV can indicate anxiety and
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therefore a greater possibility for movement in the underlying stock.
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Richard doesn’t want IV to rock the boat. “Buy low, stay low” is his credo.
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Rho is positive also. A rise in interest rates benefits the position because
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the long-term call is helped by the rise more than the short call is hurt. With |