Crd bull spread or ratio spread?

D

dojibear

IMHO, CSCO has an important resistance @ 20. If it managed to break it, I would be bullish on CSCO untill the next minor resistance @ around 21.50-22.00.
I am thinking of 2 strategies:
(all prices are taken from Bigchart, end of today, calculations are from Hoadley's option spreadsheet).

Crd bull spread :
Buy 1 Call Jan 17.50 @ 3.00
Sell 1 Call Jan 22.50 @ 0.60
Debit 2.40

or

Ratio spread :
Buy 1 Call Oct 17.50 @ 2.45
Sell 3 Call Oct 22.50 @ 0.15
Debit 2.00

Both will give a max profit if stock is @ around 22, a break even point at 19.50 - 20.

Other than the smaller debit (thus max loss), the only difference that I can see is that the ratio spread gives me a positive theta if CSCO stays in the 20 range, whereas the Crd Bull Spread has zero theta. The draw back with the ratio spread is that if CSCO gaps up the next day, pass 22.50, the spread will start losing value.

(As for volatility, I am not sure how to figure it out yet.)

Am I wrong in my calculations somewhere? Any comments would help.
TIA

Cheers!! :)
 
i don't ever trade csco (not since fall of 2000, anyway) but if the jan20 calls are really trading at $1.45x1.55 i'd buy the shares and sell those jan20 calls. it's in an uptrend so it has lots of sup, and if it holds 20 thru january (seems pretty likely) you'll have sold your shares at 21.45...which is decent percentagewise...

just my .02
 
Bung,
Thanks for the reply. Indeed, 1.45/20 = 7.20% ROI in 5 months, I'll take that anytime. However, this means that I'll have to fork out 2K$ to buy the stock, and no parachute. With the spreads, it would cost only about 200$, and I could use the 1800$ for something else.

Cheers!!:)
 
I trade csco, in fact, today I put on a new position for some of the reasons you mentioned. Although, I'm looking to take advantage of a move either way. I can't really comment on the vertical as it isn't my style and fairly straight forward anyway; you're just straight bullish with limited risk and profit potential. I do regularly trade ratios though. My reluctance with your idea is that the 22.5 don't provide a good hedge, which I normally look for. There isn't much of a premium to compensate for a down move in the stock; it is at resistance after all. If the stock drops back to its recent range, the trade loses. A quick move up will make you short and start losing money at 22. I would prefer to trade 20s against 22.5s, better risk/reward. If you look at it from the perspective that a 1 by 2 in those strikes can be done for a .45 cent debit(I would look to do it for .40) and the Sept 20s are traing for .40 with the stock right here, you aren't really risking much.
 
Quote from dojibear:

IMHO, CSCO has an important resistance @ 20. If it managed to break it, I would be bullish on CSCO untill the next minor resistance @ around 21.50-22.00.
I am thinking of 2 strategies:
(all prices are taken from Bigchart, end of today, calculations are from Hoadley's option spreadsheet).

Crd bull spread :
Buy 1 Call Jan 17.50 @ 3.00
Sell 1 Call Jan 22.50 @ 0.60
Debit 2.40

or

Ratio spread :
Buy 1 Call Oct 17.50 @ 2.45
Sell 3 Call Oct 22.50 @ 0.15
Debit 2.00

Both will give a max profit if stock is @ around 22, a break even point at 19.50 - 20.

Other than the smaller debit (thus max loss), the only difference that I can see is that the ratio spread gives me a positive theta if CSCO stays in the 20 range, whereas the Crd Bull Spread has zero theta. The draw back with the ratio spread is that if CSCO gaps up the next day, pass 22.50, the spread will start losing value.

(As for volatility, I am not sure how to figure it out yet.)

Am I wrong in my calculations somewhere? Any comments would help.
TIA

Cheers!! :)
More...

Sorry to say this, but my belief is that both strategies are not really great approaches to this trade, but considering possibility of gaping up or sharp upside move your ratio spread is too risky IMHO, especially using aggressive 1:3 ratio.
 
Dojibear,

First of all, it's incorrect to say that the bull call spread has a "zero theta". It has a NEGATIVE theta. Second, if you want positive theta and you believe 20 represents pretty firm resistance, then I'd suggest you consider selling a Sep 20/22.5 bear call spread. The other trade that might make sense given your market outlook (resistance at 20 or moderate break-out above) is a call ratio backspread, which should be done for a credit. If so, you should probably use the Jan '04's. Good luck.

Regards,

HD
 
Thanks for all your replies, very helpful. I just got back to my desk this morning, so didn't have time to look thru' all the suggestions for CSCO. However, last night I looked at SUNW, and notice this morning (11:40)
SUNW last trade 4.15
Call Jan 4 = .65 - .70
Call Jan 5 = .30 - .35

If I :
Buy 1 Call Jan 4 @ .70
Sell 3 Call Jan 5 @ .30
Credit 0.20
If SUNW goes back down under 4, I'll keep the premium, if it went up to 5 (that's 20% from last trade, but could be done in 5 months), I'll start losing my spread value. Would that be considered as a good credit spread?
The problem is that if it went to 5 a few months before expiration.

Thanks again for your inputs.

Cheers!! :)
 
1:3 ratio on a $5 seems a little risky, check out IV also to see if there is some fat on the options you are writing, might want to buy some insurance on upside, turn it into a fly since Jan options is a long time.
 
If CSCO is trading at 20 (I know it's a little higher now), then the call spread will have close to zero theta if not positive theta. Without using any kind of option calculator, the easiest way to figure out the theta of a trade is to look at the out of the money options at that strike. For example, just looking at delayed quotes from CBOE.com, with the stock at 20.53, the Jan 17 1/2 call is 3.70-3.80, with the put being .60-.65. The Jan 22 1/2 call is .90-100, while the Jan 22 1/2 put is 2.75-2.90. If the stock were to stay right here until Jan expiration, the Jan 17 1/2 strike would lose roughly .60 in premium due to decay, while the Jan 22 1/2 strike would lose about .90, giving a positive .30 cents theta on the trade. I could be on crack, but I believe I'm correct.

Vega:D
 
Vega,

It's actually slightly less since theta decay is non-linear and accelerates as the options approach expiry. But I think a more important point raised by your post is the advisability of pulling up a risk graph with all the greeks set out for any contemplated position before getting into a trade. (Dojibear, I think doing so would help you compare the various alternatives from a risk reward perspective under various scenarious based on changes in the underlying and volatility over time.)

Regards,

HD
 
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