Bull Call Spread Max Value BEFORE Exp

[rjjaz]

Aye, you sure did... Obv, pls don't forget that this is a rough estimate.

Actually, it seems the time value of the short call is what is preventing max value, even though the stock is above both strikes now.
If I have the patience, the time value of the short call should go down as we approach expiration, and as long as the stock stays above the short call strike (130) by exp., the position should net the whole spread value of 15, correct?
So I just have to be really patient and monitor the stock such that it doesn't tank below 130? (the only risk it seems)

 

[Martinghoul]

Actually, it seems the time value of the short call is what is preventing max value, even though the stock is above both strikes now.
If I have the patience, the time value of the short call should go down as we approach expiration, and as long as the stock stays above the short call strike (130) by exp., the position should net the whole spread value of 15, correct?
So I just have to be really patient and monitor the stock such that it doesn't tank below 130? (the only risk it seems)

Well, the time value of the short call is going to go down, but so will the time value of the long call.

To illustrate, lemme ask you a simple question Let's say the stock is at $132 a week before expiry... I offer you the call spread for 15. Would you buy? What about 1 day before? Where would the stock have to trade for you to be willing to buy the call spread for 15 and how close to option expiry?

 

[rjjaz]

Well, the time value of the short call is going to go down, but so will the time value of the long call.

To illustrate, lemme ask you a simple question Let's say the stock is at $132 a week before expiry... I offer you the call spread for 15. Would you buy? What about 1 day before? Where would the stock have to trade for you to be willing to buy the call spread for 15 and how close to option expiry?

I'm going to assume I should never buy it for 15, as it would always be worth less than 15 until expiration due to time value.

For in the money call options, the closer an option is to a long stock position – this means the lower its strike price is – the smaller its time value will be. The time value will increase as the option gets closer to the at the money area.

Thus the spread would never be 15 until time value on both is zero?

So isn't my decision moreso: am I willing to take the risk of holding a spread worth 13 for a return of 2 more points in the span of a month, with the projection that the underlying stays above 130?

 

[newwurldmn]

Yes. You are correct.

 

[Martinghoul]

I'm going to assume I should never buy it for 15, as it would always be worth less than 15 until expiration due to time value.

Thus the spread would never be 15 until time value on both is zero?

Yeah, so let's put it this way... The value of this call spread will "asymptotically" approach 15 as it gets closer to expiry and/or the underlying goes unequivocally and irreversibly through the upper strike.

So isn't my decision moreso: am I willing to take the risk of holding a spread worth 13 for a return of 2 more points in the span of a month, with the projection that the underlying stays above 130?

Yeah, precisely, with the risk, obviously, that the stock in question could fall below 115 during the same period and you could lose your 13. You can do the calculation of the odds implied and see if you like them.

 

[rjjaz]

Yeah, so let's put it this way... The value of this call spread will "asymptotically" approach 15 as it gets closer to expiry and/or the underlying goes unequivocally and irreversibly through the upper strike.

Yeah, precisely, with the risk, obviously, that the stock in question could fall below 115 during the same period and you could lose your 13. You can do the calculation of the odds implied and see if you like them.

Risking 13 to get 2 is, well, indeed risky. Good point. I suppose there's no way to protect the profits without selling.

 

[Martinghoul]

Risking 13 to get 2 is, well, indeed risky. Good point. I suppose there's no way to protect the profits without selling.

Well, you could do some fancy schmancy stuff to, effectively, take some money off the table. But, ultimately, in case of a call spread, selling at least some of the position is the only proper way to do it. There is one thing I occasionally like to do, which lets me feel good about the position and keep it w/o agonising over whether I've done the right thing or not. It's just a bit of a mental fudge of sorts. I sell the fraction of the position that would fully recoup the premium paid. Then I can hold on to the rest, as it becomes a free lottery ticket. You never sell free lottery tickets, obviously.

 

[rjjaz]

Well, you could do some fancy schmancy stuff to, effectively, take some money off the table. But, ultimately, in case of a call spread, selling at least some of the position is the only proper way to do it. There is one thing I occasionally like to do, which lets me feel good about the position and keep it w/o agonising over whether I've done the right thing or not. It's just a bit of a mental fudge of sorts. I sell the fraction of the position that would fully recoup the premium paid. Then I can hold on to the rest, as it becomes a free lottery ticket. You never sell free lottery tickets, obviously.

I've closed 60% of the spread position. Left the 40% to run/play - now bring on the fancy schmancy please...