Long Call Verticals on LEAPS, legging out

However, in order to close the short leg you would need to find somehow 2.36 to pay for that, which is 4.6 times higher than the original debit for your vertical, and also you would need to find 2.65 to increase your long position, which is 5.2 times higher than your original debit. I do not see how you can do it only from the proceeds of the short leg, and it seems to me that the only way you can do that is by adding new money.

And if you do so, you are just legging out of vertical and at the same time buying new long calls with substantial "new" money, and I am not sure that was your original intent, and also by that you may lose the substantial benefit of your original vertical (relatively small dollar amount at risk with high leverage).

Did I get you correctly or is there something that I am missing here? [/B]
More...

I have come to conclusions on the paper trade account (the short ones decayed in value very quickly).

You are correct, it does require "new" money to close the short leg. I'll have to do further analysis on how to manage this kind of position.

Fortunately my risk management keeps positions at 3% of total portfolio so therefore I will always have enough "new" money to help warp the risk profile accordingly. I do need to analyze how this iteration will affect the overall p/l
 
There are problems with your premise. You're selling OTM calls to reduce the cost of your long calls. Therefore, you can buy many more lower priced vertical call spreads than higher priced long legs. Yes, the entire position can take a loss quickly and it is nothing in compared to if you were only outright long. But to the upside, those short calls are a drag on the position and the leverage won't be anywhere near what you think it will be. Outright long calls will probably outperform.

In addition, when you take that 50-80% gain on the decayed short leg, you're likely to be carrying a 60-90% paper loss on the lower strike call. And then you add more money to average down the cost of the long calls. You become deeper in the directional hole.

There's no magic to the position. It's success will depend on your ability to pick underlyings that run up enough to offset the cost of your options. It's as simple as that.
 
Quote from spindr0:
In addition, when you take that 50-80% gain on the decayed short leg, you're likely to be carrying a 60-90% paper loss on the lower strike call. And then you add more money to average down the cost of the long calls. You become deeper in the directional hole.

There's no magic to the position. It's success will depend on your ability to pick underlyings that run up enough to offset the cost of your options. It's as simple as that. [/B]
More...

Hey so I have run some paper trades (let some weeklies depreciate) using the methodology

and basically the risk profile max loss changes from 100% to max 200% loss after realizing the gain on the decayed short leg. This is tolerable if your position size is only 3% of your entire portfolio - as it is in these paper trades.

Now I did this simulation with weeklies, but with LEAPS you will still have 6 months and 2 earnings seasons to retain your bullish outlook. as well as buy inexpensive puts for the next reason:

Initially lets say the long leg costs $1.00 /contract , your account is $20,000 so you literally could only afford 200 of those contracts.

Assume stock price remains stagnant.

After the short leg has depreciated you now have an additional few thousand dollars in paper profit (your account net worth won't show this because the long leg also has a few thousand dollar loss). The long leg is also now worth only $20 , so now you can actually afford buying dozens more of the long contract, that you initially couldn't afford.

Your average price on the long contract will be only a third of your original entry. So lets say you entered at $1.00 , then bought multiples more at $20, your average price will be $35/contract.

In a normal situation where price remains stagnant, you need a much further bullish move in the underlying just so your calls become profitable at all.

So in several scenarios this gives you more bang than just buying outright calls, because now you averaged down the entry price of your long calls greatly, without greatly multiplying your risk.

Now you own 5 times as many long contracts and still have 6 months for something bullish. one put can offset losses, a bullish move will GREATLY offset the put.
 
Quote from traderlux:
what underlies are you thinking about?
More...
Quote from cqm:
high beta equities that I would be bullish about over the next 12 months
More...


We need a real stock symbol to look at the numbers. Your $1.00 call option example is no good.
 
Quote from ForexForex:

We need a real stock symbol to look at the numbers. Your $1.00 call option example is no good.
More...

sorry, use AAPL or GLD


but put this under the harshest scrutiny because I am looking for the flaws

the "capped gain" complaints (of 400% by the way) on the spread itself isn't really an issue for me.
 
Quote from ForexForex:

OK ...... an AAPL April12 500/505 Call spread will cost about $1.00. AAPL is $406 today and that of course means a $100 gain in about 6 months.


http://finance.yahoo.com/q/op?s=AAPL&m=2012-04
More...

use the JAN 2013.


You will be evaluating the short leg for close 6 months in two of three scenarios.

1) price is stagnant and theta has eaten it away
2) price has fallen to a support level, and theta has simultaneously eaten it away.

the third scenario means AAPL has been very bullish and the bull call spread has reached max profitability.

closing the short leg will then just be the first part of the strategy. if you are still bullish on AAPL due to predicatable run ups in their earnings and product release cycles, then use "new money" to help you close the short leg, and buy more of the long 500 calls (greatly lowering your average entry point)
 
Quote from cqm:

So in several scenarios this gives you more bang than just buying outright calls, because now you averaged down the entry price of your long calls greatly, without greatly multiplying your risk.
More...
As a general rule, spreads do not give you more bang for the buck than an outright long except in those infrequent instances where the UL goes right up to the short strike or you make some ideal, perfect timing adjustment. In reality, that does happen but in the big picture, it's a small percentage or occurences.
 
Quote from cqm:

After the short leg has depreciated you now have an additional few thousand dollars in paper profit (your account net worth won't show this because the long leg also has a few thousand dollar loss). The long leg is also now worth only $20 , so now you can actually afford buying dozens more of the long contract, that you initially couldn't afford.

Your average price on the long contract will be only a third of your original entry. So lets say you entered at $1.00 , then bought multiples more at $20, your average price will be $35/contract.
More...
Your account value will always show the the net effect of paper gains and paper losses.

One of the many problems with your premise is that whatever the further OTM short leg decays, the long leg will decay more. That means a net loss of account value. Only a cooperative underlying will offset that. Get that? NET LOSS.

If at the present time, calls are considered expensive at $1, doing spreads at a lower net cost and waiting waiting six months for those $1 long leg to be worth 20 cents will lose account value. If you're that bullish on the underlying, just buy whatever strike is currently at 20 cents. Period.

I appreciate all the effort that you put into your posts but your strategy as described just isn't going to work.
 
You must log in or register to reply here.
Back
Top