Complicated Question from Equity Trader...

L

Lintagoose

I'm hoping someone with knowledge can help me answer this question. I understand why this wouldn't have much interest b/c its a unique, complex situation.

Short term bullish gap, with
decrease in Vol and subsequent price decrease

Can an ATM or ITM option near expiration (with little premium) outperform a later expiration, higher priced option? Can you take advantage of lower Delta, lower Vega option to increase in value less than the ITM, ATM option on a short term basis?

The front month expiration can be covered in stock, while the further month, underperforming credit can be closed at a late date.
 
Quote from Lintagoose:


Can an ATM or ITM option near expiration (with little premium) outperform a later expiration, higher priced option? Can you take advantage of lower Delta, lower Vega option to increase in value less than the ITM, ATM option on a short term basis?
More...

No, because your statements are contradictory.
 
Again, with this guy. I've already stated that I'm new to options. I am an equities trader and I'm trying to learn. I'm also trying to put an equity strat I've been using for 5 years into options terms. Please explain instead of jab condescending comments my way. Perhaps, I can clarify or amend if I've made a mistake.
 
I didn't understand what you were saying either. It's hard to ask for clarification when you seem to be talking about 3 very different things interchangeably.
 
I agree I may have made mistakes in describing the situation...that was my disclaimer about being mostly in equities.

Let me try again.

I think it can be described as a reverse calendar call spread.
Long ITM or ATM call in front month
Paired with a short OTM call next month

If you get a bullish gap and subsequent sell off, the ATM call should go dollar for dollar into gap, but the OTM call increase less (assuming the gap is not close to its strike). Am I wrong about this?
 
Quote from Lintagoose:

I agree I may have made mistakes in describing the situation...that was my disclaimer about being mostly in equities.

Let me try again.

I think it can be described as a reverse calendar call spread.
Long ITM or ATM call in front month
Paired with a short OTM call next month

If you get a bullish gap and subsequent sell off, the ATM call should go dollar for dollar into gap, but the OTM call increase less (assuming the gap is not close to its strike). Am I wrong about this?
More...

The NKE 50/55 diagonal (short). You're long the Feb50C and short the Mar55. The ITM is essentially a proxy for the shares (small extrinsic premium means virtually no gamma in Feb), so that all exposure beyond delta is in the short Mar call.

Most people would trade these as a delta trade in Mar vol. Meaning that they would initiate looking for a drop in Mar vol as well as being bullish on NKE.

You should probably look to a single-month vertical to take some vol-risk out of the equation.
 
The NKE 50/55 diagonal. You're long the Feb50C and short the Mar55. The ITM is essentially a proxy for the shares (small extrinsic premium means virtually no gamma in Feb), so that all exposure beyond delta is in the short Mar call.

Most people would trade these as a delta trade in Mar vol. Meaning that they would initiate looking for a drop in Mar vol as well as being bullish on NKE.

You should probably look to a single-month vertical to take some vol-risk out of the equation.

*It's a long diagonal.
 
Thanks, Atticus. That is very helpful...that is exactly what am trying to accomplish. It is an unusual setup Tgat I'm using it for, but I usually do it directly with stock. The prob is, while probability is high that I get the move I want when, it eats up a lot of bp and carries all the risk. This type of trade would help two fold I believe. I'll give it a shot in a couple names with the setup and post whether it acted as wxpected.
 
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