Am I understanding the concept(s) of this Strategy?

M

md2324

I've really been studying all things Options, over these last few weeks, and have found a strategy that seems to fit my trading methodology, but I want to make sure that it is applicable in real life Options trading.
What I'm trying to do, is to make sure that I have my Math correct, in figuring out the numbers to these 2 Option calculations.

The thing I am wanting to do , is to place OTM Bull Call trades, and then buy back the sold Call, as soon as I am profitable enough in the trade, to buy back the sold call.

I want to do this, so that I can have a Runner left in the trade ( the bought Call ), to capture most of the move.

The First one pertains to doing an OTM Bull Call spread , and the formula for knowing if I can do this particular " strategy "........ Example: Stock at $338 at the time I put on the trade and I bought the $360/$370 OTM Bull Call spread , for a Max risk of $1.09

Now let's assume the stock gets to $355 and it takes 11 days for the stock to get there.

Now the Bid x Ask at this point is $2.47 x $.58 , with a current Value of $1.89 ( the difference between the bid and the ask ) , and so by subtracting the $1.89 from are max risk of $1.09 on the trade, we have a profit now of .80.

My Question is...... since I am profitable at this point in the trade, by .80 cents and the current bid x ask is $2.47 x .58 , can I now buy back the sold call at .58 cents, since I am up .80 cents and thus buy back to close the sold call of the trade ?

The Second question I had, relates to the above question, but I'm wondering how I do the Math, for bid x ask quotes, that have the bid in Negative numbers ( -.30 , -1.54 , -2.25 ) .

For example...... Lets say The OTM Bull Call for the $230/$227.50 strikes, have a bid x ask of -.40 x .85

The difference between this bid and ask is .22 ( are max risk on the trade )

Now lets say that the stock moves in our favor , and the bid x ask is now trading at -.10 x 1.25 , so we have a profit of .57 cents, correct ?

If we are now up .57 cents in the trade, and are max risk in the trade is .22 cents , that means that we have a realized profit of .37 cents ?

So the question boils down to...... with a profit of .35 cents, and the sold option currently trading at -.10 cents, do we have enough to buy back that sold call ?
Maybe I need to go back to 4th grade math lol ,but I seem to not be able to grasp the math behind buying back a position, that has a Negative sign in front of it
 
That was kinda wordy. Most of us have the attention span of gnat.

I think you said that:

You do a Debit call spread.

You buy back the short call after a positive move, which is good because you are letting "winners run." And, the volatility has probably dropped and has made your short option even cheaper.

Here is one problem: You have thrown your sizing methodology totally out of whack.

Check/Model the delta of the spread vs naked position. Have you ever scaled a trade on the underlying 1-5 or 1-10? Might as well just do momentum trading based on autocorrelation. Your sizing will overwhelm whatever original strategy you had.

Options provide a volatility edge. Read up on Hull, Natenburg and Sinclair on how to use that edge.
 
md2324 said:
The thing I am wanting to do , is to place OTM Bull Call trades, and then buy back the sold Call, as soon as I am profitable enough in the trade, to buy back the sold call.

I want to do this, so that I can have a Runner left in the trade ( the bought Call ), to capture most of the move.

The First one pertains to doing an OTM Bull Call spread , and the formula for knowing if I can do this particular " strategy "........ Example: Stock at $338 at the time I put on the trade and I bought the $360/$370 OTM Bull Call spread , for a Max risk of $1.09
More...


Bull Call Spread / Debit Spreads are useless, the short call is like having a piano tied to your back. I recommend buying the call ONLY and if you want to reduce the cost/risk move it up 1 strike. In your example instead of the 360/370 debit spread buy just the 360 or 365 call.

Paper trade the two positions and compare them as they progress:


  • Trade 1: 360/370 Call Debit Spread.
  • Trade 2: Long 360 or 365 Call.
:)
 
Just wanted to add, option trading has a very critical time element.

The expert traders on ET won't admit to this, but we sometimes turn short term trades into long term trades when a trade doesn't go as planned. Options is less forgiving when you do this.

Everything has to be framed perfectly when you make structure the trade. Legging in and out, adjustments is best left for the really astute operator.

If you wan't to leverage a trading entry and exit technique, use futures. Otherwise, read the books!
 
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