Help me understand this position

F

frostengine

I have sold 1 Mar28 87.5 call for .43
I have bought 2 Apr20 90 calls for .54 each
The position was entered for a debit of $.65
Stock currently at $87.11


The way I look at this position is come Friday, if I am between 86.33 and 89, I am positive

If at 87.50, I make $40 or so

Somewhere between 89 to 91 I am down $10 and above 91, become positive again

After Friday expiration, I can sell the next weekly the Apr5 call, and I have a lot of options. Can then repeat this for another weekly after.

The trade looks like an overal low risk trade, with good opportunity to make money as the stock sits around this area and can make a lot of money with a strong run up.

I see a max risk of around $150 with a very substantial volatility drop. If volatility increases by the same drop, then the position can make a LOT of money.

What am I overlooking here?
 
Quote from frostengine:
----sold 1 Mar28 87.5 call for .43
----bought 2 Apr20 90 calls for .54 each
----entered for a debit of $.65
----Stock currently at $87.11
----between 86.33 and 89....
----If at 87.50....
----between 89 to 91....
----above 91....
----looks like an overal low risk trade....
----What am I overlooking here?
More...
1) ? .... Between 86.33 and 89, you have to be prepared for the position to lose more than you expect to the downside from $87.11 and to $89 on the upside. You can be justified in feeling paranoid that your "longs" can behave weaker than expected compared to your "shorts". :(
2) ? .... At $87.50, I believe you are underestimating the pin-risk and overestimating the premium-decay. Your "short" may remain firmer than you expect and you can be in doubt as to whether to offset that option or hold it through expiration. :mad:
3) ? .... Between $89 to $91, you could be hurt a lot more by the gamma on the "short" while vega might impact the "long" worse than you expect. :confused:
4) ? .... above $91 and beyond......far, far beyond, that's where the position becomes "golden". :D
 
Quote from frostengine:
----name for this type of strategy?
----alternatives with similar profiles?
More...
1) ?...... Diagonal Call Backspread. :cool:
2) Go to the option exchange website(s) for the pictorals of the various basic strategies. :)
 
This does appear to be a diagonal backspread. However, most of the examples I find seem to sell an ITM option. To me it appears its much better to sell a slightly out of the money option. By doing so,it appears you can remove the risk of the stock just "sitting there". In fact it turns this into a positive, whereas a typical diagonal backspread performs very badly when the stock just "sits there".

It almost seems more like simply buying a call. Except it provides a little more downside cushion, a much more favorable outcome for a stagnant market, and a slightly dampened upside for the initial move compared to a pure call.
 
I did 2 more positions like this today:

Sold FB Mar28 26 call for .17
Bought 2 FB Apr12 26.5 calls for .34 each

Sold BBRY Mar28 15 call for .69
Bought 2 BBRY Apr26 15.5 calls for 1.15 each

With 3 positions like this, gives me a chance to see how it works out in various conditions. The CAT position is current down on the low end. The FB position is up on the up end. And BBRY is volatile as hell. Should give me a good view point in 3 different conditions for this type of strategy. My goal with each of the positions will be to close them out tomorrow afternoon and roll the short call into the Apr5 expiration.
 
You realize you are basically just naked long one out of the money contract with exposure to the downside of 2 contracts.

So if the stock rips up you will make money cause you are long one extra unit. If the stock stays her you will lose money because you are short theta and if the stock goes down you lose money as well.

Why don't you just put on a calendar. That way you can make money 2 out the three possible ways the stock can move. Higher probability.
 
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