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a short call ladder
- Thread starter 0008
- Start date
Quote from heech:
I don't get this. At 40, the middle long call comes ITM. Why would max loss be between 40/45?
Obviously if you and spindr agree on this, I'm not debating the point. Just curious. And too lazy to fire up a chart so I can cheat.
For the very simple reason that the short 35 call will be more ITM. Forget about the long 45 call for a minute, and what you are left with is a 35/40 short call vertical, which has a max loss above the long call strike and a max profit below the short call strike.
Quote from spindr0:
OOPS, my bad!
Since I have your attention, here's another loony question (g).
I'm gamma scalping stock against ATM long puts. Is there any advantage to using puts a strike ITM? They have a higher delta and less time premium so with those ITM, less TP would be paid out and decay would affect the position less.
OTOH, with fewer ITM puts, the ITM risk graph isn't the standard balanced V. I know I'm missing something but I can't put my finger on it.
I'd say that since you are gamma scalping you want max gamma and to get that you need ATM.
Oh yes, sure, I see. I was thinking of 40 as the max loss point... but obviously 40-45 all have that same max loss, while 35-39 doesn't.Quote from MTE:
For the very simple reason that the short 35 call will be more ITM. Forget about the long 45 call for a minute, and what you are left with is a 35/40 short call vertical, which has a max loss above the long call strike and a max profit below the short call strike.
Yep,you're right... that's the case. The ITM put has a higher delta and lower gamma so it creates an unbalanced risk graph (less option delta gained as the underlying drops versus a higher delta loss if the underlying rises).Quote from MTE:
I'd say that since you are gamma scalping you want max gamma and to get that you need ATM.
I doubt that this will make much sense but so far, what I'm seeing but not quite grasping the practicality of the tradeoffs is ...
Using the first ITM put means that fewer puts need to be bot since the delta is higher. That means less time premium purchased and the maximum loss if traded until expiration (which I usually don't) will be lower. That's a good thing.
But the ITM put (compared to the ATM) lowers the maximum gain in either direction away from current price, should you get that nice move. Not a good thing.
Guess I need to crunch some numbers.