Is this idea crazy ?

[skanan]

This is just an idea for delta neutral trade for me.

Sell OTM call spread and buy stock to offset the delta.

Example:
Sell AAPL Feb 90/95 call for $1 with total delta -12 , Gamma -.68, Theta .97, Vega -1.7
Buy 12 AAPL at 84.29.

I plotted P&L graph it shows large profit zone at expiration. The profit zone seems to be from 75.83 to 91.94.

It also has limit risk.

What's wrong with this strategy ? Has anyone trade this way ?

Thanks,

 

[MTE]

Your position basically looks like a long stock with a kink in the middle (or as a tilted letter "Z"). As the stock moves down you start losing money, all the way to zero. You have a profit up to about 92, after that you have a loss up to about 117 area, from there you have a profit again.

It is by no means a limited risk strategy.

Your max profit in the middle range (ingoring ranges below 76 and above 117) is achieved if the stock is at 90 at options expiry, and max loss if the stock is at 95 at expiry.

 

[momoneythansens]

Skanan,

This is a strategy employed by some folks for enhancing portfolio returns etc. so it might be considered if you are already long stock.

Long stock as we know has unlimited risk (down to zero anyway) so it is not limited risk in that sense.

Breaking it down we have:

Long stock = long call short put
Bear Call spread = short call long call

So from that, if we cancel out the long call from the long stock with the short call from the call vertical we can see th position is:
long call short put!!! i.e. it will be the same profile as long stock but with a split in the middle due to the different strikes.

i.e. a split strike combo of sorts.

The position is basically a covered call with an extra long call that allows you to to participate in further upward moves.

i.e. we all know that a covered call is a short put

So the position you are suggesting is actually synthetically equivalent to something like:

Short 90 put
Long 95 call

You might save your self some commissions by trading this instead if you don't already own the stock.

[EDIT] IGNORE ALL OF ABOVE LOL - I see you are not buying 100 shares but instead, enough to neutralise delta

MoMoney.

Quote from skanan:

This is just an idea for delta neutral trade for me.

Sell OTM call spread and buy stock to offset the delta.

Example:
Sell AAPL Feb 90/95 call for $1 with total delta -12 , Gamma -.68, Theta .97, Vega -1.7
Buy 12 AAPL at 84.29.

I plotted P&L graph it shows large profit zone at expiration. The profit zone seems to be from 75.83 to 91.94.

It also has limit risk.

What's wrong with this strategy ? Has anyone trade this way ?

Thanks,

 

[skanan]

Thanks! You are right it is not a limited risk stategy. The stock could go down to zero. I was thinking about limited risk on the down size because I did not buy 100 shares of stock.

Quote from MTE:

Your position basically looks like a long stock with a kink in the middle (or as a tilted letter "Z"). As the stock moves down you start losing money, all the way to zero. You have a profit up to about 92, after that you have a loss up to about 117 area, from there you have a profit again.

It is by no means a limited risk strategy.

Your max profit in the middle range (ingoring ranges below 76 and above 117) is achieved if the stock is at 90 at options expiry, and max loss if the stock is at 95 at expiry.