buying two strike price calls on the same stock/date... does anybody do this?

[ironchef]

The only way it makes sense to buy them both is if they have the same IV, otherwise just buy the one with the lower IV, as IV differences in the same underlying reflect the relative over/under-pricing of the option.
E.g., if we assume that the ATM SPX option is efficiently priced, meaning that over many trades, buying the ATM results, before commission and slippage, in breaking even, then buying the options with the higher IV - usually ITM for calls and OTM for puts - would result in a loss. This explains why selling OTM puts and buying OTM calls tends to be profitable when done with proper money management.

Thanks, that make sense.

 

[stockmarketbeginner]

1 Master futures first, easier to manage in term of risk control
2 You would be broke fast if you consider out of the money options are cheap. If they are cheap, there is a reason.
3 Better sell than buy options, except if you got excellent timing, so master futures first.

CM

CM[/QUOTE]

1 Master futures first, easier to manage in term of risk control
2 You would be broke fast if you consider out of the money options are cheap. If they are cheap, there is a reason.
3 Better sell than buy options, except if you got excellent timing, so master futures first.

CM

Hello,

Thank you for your response. Why should a person first learn futures? I thought they were more exotic and had to do with advanced topics like international currency and commodities. I thought I was starting simple with options on stocks.

 

[Chris Mac]

CM

Hello,

Thank you for your response. Why should a person first learn futures? I thought they were more exotic and had to do with advanced topics like international currency and commodities. I thought I was starting simple with options on stocks.[/QUOTE]
There are hundreds of futures: equities, bonds, commo, forex. With futures, you "only" need the correct side, size and stop loss. With options, you also need excellent timing and choose good strikes. Quite more difficult.
Without leverage, you should survive longer with futures.

CM

 

[spindr0]

It is more expensive (higher total extrinsic premium paid) to buy 1 OTM and 1 ITM than 2 ATM contracts.

No. The greatest amount of time premium is ATM so 2 ATMs will cost more extrinsic.

But if the underlying makes some decent moves, the payout of 1 OTM + 1 ITM is higher than 2 ATM.

Also no on the 'decent move'. Consider an ATM equidistant Butterfly (XYZ = $100 and $98/100/102 call butterfly). The net delta won't be far from zero and outside of the wings, the 2 long options offset the two shorts so there is no difference in payout. It's between the wings where the payout varies.

 

[ironchef]

No. The greatest amount of time premium is ATM so 2 ATMs will cost more extrinsic.




Also no on the 'decent move'. Consider an ATM equidistant Butterfly (XYZ = $100 and $98/100/102 call butterfly). The net delta won't be far from zero and outside of the wings, the 2 long options offset the two shorts so there is no difference in payout. It's between the wings where the payout varies.

Yes you are correct, I misspoke.

If like OP said, buy 1 ATM and 1 OTM, then returns are bette than if I buy 2 ATM in a significant up move and losses would be less in a significant down move?

 

[spindr0]

Yes you are correct, I misspoke. If like OP said, buy 1 ATM and 1 OTM, then returns are bette than if I buy 2 ATM in a significant up move and losses would be less in a significant down move?

And I misspoke as well. The OP asked about buy 1 ATM and buy 1 OTM versus buy 2 ATM and in my last reply I used an ATM butterfly as an example (using 2 ATM versus 1 ITM and one OTM). My bad.

Let's make this really simple. What does

(A) buy 1 ATM and buy 1 OTM
versus
(B) buy 2 ATM

have in common? Each psoition has an ATM leg so let's remove that from the equation. So the comparison is, buy 1 OTM versus buy 1 ATM and the respective performance of each of those is obvious.

 

[ironchef]

And I misspoke as well. The OP asked about buy 1 ATM and buy 1 OTM versus buy 2 ATM and in my last reply I used an ATM butterfly as an example (using 2 ATM versus 1 ITM and one OTM). My bad.

Let's make this really simple. What does

(A) buy 1 ATM and buy 1 OTM
versus
(B) buy 2 ATM

have in common? Each psoition has an ATM leg so let's remove that from the equation. So the comparison is, buy 1 OTM versus buy 1 ATM and the respective performance of each of those is obvious.

Right again.

I feel bad! I am soooo dumb!

 

[spindr0]

Don't feel bad. For the past hour, I have been getting educated in a PM convo on how a structured index product with a 10% cap and 10% of downside protection is synthetically equal to a bearish put spread paired with a covered call and how an arb may be possible. I should have caught the synthetic equivalence but I'm not grasping the arb yet since my learning curve is a little bent.

The point? Ask questions and if someone can explain, it's bonus points. And no matter how foolish the question, you still get to walk around in your underwear at home (please, no JPG uploads!!!).

 

[spy guy]

Right again.

I feel bad! I am soooo dumb!

the market can make us all feel dumb at times