23 lines
1.5 KiB
Plaintext
23 lines
1.5 KiB
Plaintext
was going up. They were right and still lost money. As the adage goes,
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timing is everything. The more time that passes, the more advantageous the
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lower-theta vertical spread becomes. When held until expiration, a vertical
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spread can be a better trade than an outright call in terms of percentage
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profit.
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In the previous example, when Apple is at $391 with 40 days until
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expiration, the 395 call is worth 14.60 and the spread is worth 4.40. If
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Apple were to rise to be trading at $405 at expiration, the call rises to be
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worth 10, for a loss of 4.60 on the 14.60 debit paid. The spread also is worth
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10. It yields a gain of about 127 percent on the initial $4.40 per share debit.
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But look at this same trade if the move occurs before expiration. If Apple
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rallies to $405 after only a couple weeks, the outcome is much different.
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With four weeks still left until expiration, the 395 call is worth 19.85 with
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the underlying at $405. That’s a 36 percent gain on the 14.60. The spread is
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worth 5.70. That’s a 30 percent gain. The vertical spread must be held until
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expiration to reap the full benefits, which it accomplishes through erosion
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of the short option.
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The long-call-only play (with a significantly larger negative theta) is
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punished severely by time passing. The long call benefits more from a
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quick move in the underlying. And of course, if the stock were to rise to a
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price greater than $405, in a short amount of time—the best of both worlds
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for the outright call—the outright long 395 call would be emphatically
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superior to the spread. |