Movements up and down

N

NHS

Stock movements to react to.

Let’s say that you are trading options in a stock where historical volatility is high and the implied volatility might also be high. At some point you have a position like this:

At the time you make the position the stock price is 320:
Marts 2010 20 Long CALL Strike 320 – price 20
Marts 2010 20 Short CALL Strike 330 – price 14
Debit 20-14=6

If the stock price at exp is 330 you collect 10 and make a total of 4.

Before exp you could make some more money if the stock goes up or down? given that you are pretty sure that the stock will move a lot during the period and you will try to profit from that, and given that it at some point will turn to the 320-330.

If the stock price goes down you buy back the short? And wait for the stock to go back in the 320-330 and than you sell new calls? or?

If the stock price goes up you roll up or? and wait for the stock go back in the 320-330?
 
I'm not sure I understand what your question is. If you can time the moves correctly then you are all set to rule the world.
 
The question is, if indeed the movements go the way you think (you cannot be sure), what you should do in each case when the stock moves down and up and back in the interval? to make the most profit - given the limitation there are build into the choosen position.
 
Assuming you already have the position on you would exit the long call before the stock drops and then buy it back before it rises again, at the same time, buying back the short. Then once the stock rises you would re-short the upper call and exit the long.

If you don't want to be naked short then you would only trade in and out of the short call as the stock fluctuates.

If you don't have the position on yet then you would buy the long call wait for the stock to rise and then short the upper call.
 
Thanks. In this case it seems that Delta is the primary consideration. If prices move due to change in impl. vol. one could re-evaluate.
 
Quote from NHS:

The question is, if indeed the movements go the way you think (you cannot be sure), what you should do in each case when the stock moves down and up and back in the interval? to make the most profit - given the limitation there are build into the choosen position.
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In order to capture price movement, you need delta close to one. Hard to with a spreads or with options, unless they are deep ITM. You can capture price movement "only" in hindsight, and best done with just stock or futures rather than with options. I have abandon this approach a while back as I am tired of saying to myself: "I wish I had bought here and sold there."
 
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