GS Call Spread

M

Mike805

Hi Guys,

I'm still learning the ropes with options and I have a question regarding a current position. A couple weeks ago I purchased a GS July 19th Call spread (145 @ $6/ 155 @ 2.35). The position cost me $3.65. The current value of the spread is 11.25/5.15 or +$6.10. GS is trading at 154 so I would expect this spread to be closer to $9. I bought the spread during higher vol (not that high though), but, I was expecting more. Is there still too much time value in the 155 call? What am I missing here?

Thanks,
Mike
 
Quote from Mike805:
----GS / July / Call spread / (145 @ $6/ 155 @ 2.35).
----cost me $3.65.
----current value of the spread is 11.25/5.15 or +$6.10.
----GS is trading at 154....
----expect this spread to be closer to $9.
----bought the spread during higher vol....
----I was expecting more.
----time value in the 155 call....
----What am I missing here?
More...
1) You're expecting "too much", "too fast". :cool:
2) You need more passage of time, volatility decline and price advance for the spread to be ~$9 at this time. :)
3) The 155-call is practically at-the-money so it's value will be near a recent maximum. :eek:
4) I don't follow GS. Do they have a pending earnings release soon that is keeping option premiums firm in the interim? :confused:
 
A vertical doesn't open up to its full value until very close to expiration, or when it is deep-in-the-money. Because you bought a July vertical, there is too much time value left given the volatility of the underlying. If you had bought a May vertical (3 days to expiry), you would see the characteristics you were expecting from a July one (66 days to expiry). Currently the 145/155 GS May call spread is 8.40 mid.
 
Thanks for the replies. Good info.

I was under the incorrect assumption that upside vol would help this position more than what I see now...

Given this info about max. value near expiry, it doesn't make sense for me to hold this spread any longer since 60+ days of time risk is working against me (price has a lot of time to drop back down).

Any suggestions on how to identify vert spreads with better potential going forward - a cheap spread versus an expense one?
 
Quote from Mike805:


Any suggestions on how to identify vert spreads with better potential going forward - a cheap spread versus an expense one?
More...

A couple of thoughts...I think vertical spreads can be a good choice when you have a directional opinion and IV is elevated. As the saying goes, if you have to buy an expensive option, sell one too at the same time. It is critical though to realize what a change in volatility will mean for your spread. For example, if you are long (short) an OTM call spread and IV jumps, that will increase (decrease) the marked value; conversely for an ITM spread. With regard to timing, I do not put on verticals more than a couple weeks from expiry unless it is to hedge a long-dated position. In terms of commissions, verticals can be expensive for the number of deltas you get unless you hold to expiry.
 
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