Bull call spread losing out despite stock advancing

V

Victor123

With Blackberry (BB on TSX, not BBRY) at 12.30, I entered the 12 - 13 bull call spread, paying .86 for the long leg and getting .40 for the short leg.

Now BB is inching up to 12.50...and it is a bit odd that the long leg is gaining less than the short leg is losing.

After all, it is a bull move, so should not an increase in the stock help the position.
What is the reason for this?
 
Thank you. The 12 strike(delta = 63) has IV = 44, the 13 strike (delta = 44) has IV of 47.
So, you are saying that because IV is more for 13 strike, it is going up more?
As the underlying continues to increase, is it possible to say if the 13 call will lose more than the 12 call will gain?
 
This is why I HATE long verticals .... There's literally no edge or return on the actual move youre looking for... a long vertical is simply a bet on closing price AT expiration!! before expiration, youre f***ed...
 
IV will increase as the stock approaches $13 and as minmike said your short vega, also you have gamma risk as the stock approaches $13 meaning the short call is going to increase slightly faster than your long call due to the increasing nature of Delta.

Regards
Shelton
 
I am not sure about the date of expiry of your bull call spread - calculations show that it is about 37 days:

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First of all, it seems that the call that you sold had a higher IV than the call that you purchased - this means that the IV smile is such that you paid more for the 12 call than you received for the 13 call.

Next, if we suppose that the IV goes to 50% (and the volatility smile is flat), then the profit of your strategy will be almost zero (2 cents only) at a price of 12.50 dollars:

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The bottom line is:

1) Volatility plays an important role here.

2) The price has increased very little (from 12.30 to 12.50 only) to generate a visible profit.
 
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