bull call spread should be in profit but isn't. please explain
- Thread starter frankr
- Start date
frankr,
That's the problem with Optionetics, they don't explain all the aspects, they just throw out a few ideas and then let you learn the other apsects the hard way, like you did about vertical spreads, time decay and expiration.
As you have stated yourself, you should go back and study a bit more, pay special attention to how time to expiry affects the reponsiveness of options to factors such as stock price and volatility, and how various strategies behave prior to expiry and what must happen in order for a strategy to become profitable.
The way to avoid such costly mistakes is to not just blindly go with someone else's rules, but use a pricing model and see for yourself what happens to your position under various circumstances. For example, in your case, you could have plugged the numbers into a pricing model and simulated your position if GOOG went up to whatever your target was within a few days. If you had done that you would have seen exactly what has actually happened and I bet you would've stayed out of that spread or at least would've bought a more appropriate one.
That's the problem with Optionetics, they don't explain all the aspects, they just throw out a few ideas and then let you learn the other apsects the hard way, like you did about vertical spreads, time decay and expiration.
As you have stated yourself, you should go back and study a bit more, pay special attention to how time to expiry affects the reponsiveness of options to factors such as stock price and volatility, and how various strategies behave prior to expiry and what must happen in order for a strategy to become profitable.
The way to avoid such costly mistakes is to not just blindly go with someone else's rules, but use a pricing model and see for yourself what happens to your position under various circumstances. For example, in your case, you could have plugged the numbers into a pricing model and simulated your position if GOOG went up to whatever your target was within a few days. If you had done that you would have seen exactly what has actually happened and I bet you would've stayed out of that spread or at least would've bought a more appropriate one.
Dear mte
Optionetics doesn't "just throw out a few ideas" - all the things you have mentioned in your post are the things optionetics recommends you do,starting with plotting your risk graph. How do I know this? I've been to their seminars eight times (the last seven for free)
Happy trading
Optionetics doesn't "just throw out a few ideas" - all the things you have mentioned in your post are the things optionetics recommends you do,starting with plotting your risk graph. How do I know this? I've been to their seminars eight times (the last seven for free)
Happy trading
Quote from ra1:
Dear mte
Optionetics doesn't "just throw out a few ideas" - all the things you have mentioned in your post are the things optionetics recommends you do,starting with plotting your risk graph. How do I know this? I've been to their seminars eight times (the last seven for free)
Happy trading
OK, point taken, I've never been to any of their seminars, yet it is clear that they do not fully explain the consequences of their choices of strategies/expiries as the case at hand demonstrates. Here I mean that they say that one should buy spreads with more time to expiry so that you have more time to be right, but they fail to note that by doing so you severely limit your ability to profit from a move that takes place well before expiry, as was the case in Frankr's spread.
Anyway, I'm not going to engage into an argument about Optionetics.
Cheers
Hi mte
As far as I know, a bull call spread, no matter how long to expiry, will be profitable or at least at breakeven if the stock price moves up today/tomorrow/next week provided premium decay from time erosion doesn't offset the increase in premium from the rising stock price. Obviously some spreads will profit more than others if the stock for example, moves up today. My point is that all the spreads would show some increase or neutral but NOT a loss. The only way one could lose on a bull call spread where the underlying is going up is if iv went up significantly and that change in iv would be different for the different spreads - thus it would be wise to look at vega for the different spread scenarios.
If you plot frank's position on the risk graph then all this becomes self evident. The problem I have is trying to work out what quotes frankr is using - I've dug up the "last sale"quotes (see previous post) to arrive at an explanantion.
Anyhow, it's difficult to answer frankr's original question without knowing more detail, so I was just making some suggestions (I'm certainly not looking for arguments) and hoping someone could shed some light on this mystery
Cheers
As far as I know, a bull call spread, no matter how long to expiry, will be profitable or at least at breakeven if the stock price moves up today/tomorrow/next week provided premium decay from time erosion doesn't offset the increase in premium from the rising stock price. Obviously some spreads will profit more than others if the stock for example, moves up today. My point is that all the spreads would show some increase or neutral but NOT a loss. The only way one could lose on a bull call spread where the underlying is going up is if iv went up significantly and that change in iv would be different for the different spreads - thus it would be wise to look at vega for the different spread scenarios.
If you plot frank's position on the risk graph then all this becomes self evident. The problem I have is trying to work out what quotes frankr is using - I've dug up the "last sale"quotes (see previous post) to arrive at an explanantion.
Anyhow, it's difficult to answer frankr's original question without knowing more detail, so I was just making some suggestions (I'm certainly not looking for arguments) and hoping someone could shed some light on this mystery
Cheers
Quote from ra1:
...I've been to their seminars eight times (the last seven for free)
Happy trading
Just curious, why the need to attend eight times?
MoMoney.
Haven't really been keeping up from start of thread, but GOOG IV should be going up ,I would think, since they are about to come out with earnings. YHOO has already reported and the news wasn't bullish and YHOO suffered. GOOG's IV should be gaining as the report nears.
As far as the overall action of your spread, I am not familiar with GOOG, nor have I researched your position details at all. Just thought I would throw in a little analysis regarding GOOG IV.
As far as the overall action of your spread, I am not familiar with GOOG, nor have I researched your position details at all. Just thought I would throw in a little analysis regarding GOOG IV.
Thanks everyone for the suggestions.
Buy1Sell2
What should I do if this is the case with intraday quotes on options prices? The same day goog went above $450 as I thought it would, it went back down and closed at around $433. So in the future if a stock moves in my favor intraday, what am I supposed to do besides look at intraday quotes to make my decision on what to do with my position? Aren't intraday quotes all you have to work with during the trading day? I guess I'm asking , if intraday quotes were the reason why my trade constantly showed the short call rising in value faster than the long call, yet that is a problem because each leg of the spread is not updated at the same time, how would I know where I stand along the profit-loss continuum?
In regards to Optionetics, ra1
Did you do the advanced courses that Optionetics offers? I didn't. Maybe the details on greeks and volatility were taught in those courses but not the first course. They did mention the terms "greeks" and "volatility" many times but not in detail as I would have needed. I read the books, watched the dvds, listened to the cds, and took notes down. As you remember, they had tons and tons of examples where you plot the risk curve and they kept driving home where breakeven is and where profit or loss is on the curve. That was their main focus. Based on just that, my trade should have been in the profit. I know you mentioned you checked and my trade was in the profit, but as I said my account never at any time showed my in the profit.
ra1 and MTE
One or both of you might have suggested books to read, and if so I have written them down. But if you didn't, have you any suggestions? For that matter, if anyone at all have suggestions, please tell me. And please don't just throw out random titles that you haven't even read or have only skimmed. If there are some highly recommended books on options, especially on all the suggestions you guys have made regarding my situation with the GOOG trade, please let me know. I will start to read them as soon as I can, but if I get a huge list of recommended books it may be overwhelming.
Lastly, I'm trying to decide what to do with my GOOG position and I have to decide by Mon because earnings is due on Tue. Expectations are super high. So I will be thinking about what I should do. As it is I've lost a few hundred already on the 2 contracts. If any of you trade GOOG and have suggestions I'm open to hear them.
Thanks everyone!
Buy1Sell2
What should I do if this is the case with intraday quotes on options prices? The same day goog went above $450 as I thought it would, it went back down and closed at around $433. So in the future if a stock moves in my favor intraday, what am I supposed to do besides look at intraday quotes to make my decision on what to do with my position? Aren't intraday quotes all you have to work with during the trading day? I guess I'm asking , if intraday quotes were the reason why my trade constantly showed the short call rising in value faster than the long call, yet that is a problem because each leg of the spread is not updated at the same time, how would I know where I stand along the profit-loss continuum?
In regards to Optionetics, ra1
Did you do the advanced courses that Optionetics offers? I didn't. Maybe the details on greeks and volatility were taught in those courses but not the first course. They did mention the terms "greeks" and "volatility" many times but not in detail as I would have needed. I read the books, watched the dvds, listened to the cds, and took notes down. As you remember, they had tons and tons of examples where you plot the risk curve and they kept driving home where breakeven is and where profit or loss is on the curve. That was their main focus. Based on just that, my trade should have been in the profit. I know you mentioned you checked and my trade was in the profit, but as I said my account never at any time showed my in the profit.
ra1 and MTE
One or both of you might have suggested books to read, and if so I have written them down. But if you didn't, have you any suggestions? For that matter, if anyone at all have suggestions, please tell me. And please don't just throw out random titles that you haven't even read or have only skimmed. If there are some highly recommended books on options, especially on all the suggestions you guys have made regarding my situation with the GOOG trade, please let me know. I will start to read them as soon as I can, but if I get a huge list of recommended books it may be overwhelming.
Lastly, I'm trying to decide what to do with my GOOG position and I have to decide by Mon because earnings is due on Tue. Expectations are super high. So I will be thinking about what I should do. As it is I've lost a few hundred already on the 2 contracts. If any of you trade GOOG and have suggestions I'm open to hear them.
Thanks everyone!