Quote from atticus:
It doesn't work that way. You're only getting the 4.00 at expiration. You're treating these as binaries, when in fact the call spread is trading at 3.00 with over a week to go. If it's a foregone conclusion then you're leaving another 25% on the table by not buying the vertical here at 3.00 with your remaining free cash.
I'd bet your net liq that you don't hold the AKAM call spread to expiration, so wtf are you assuming 4.00 on the offset? That's nuts. The fact is that you got a double on your vertical, so the 1.45/4.00 R/R is GIGO. You did no better with the vert than you would've done with the long call, but yeah, I still prefer the vertical.
100% certainty? Needs high vol? 4.00? huh?
You're gambling well and I hope you parlay it into some cash. Please stop with the math as it's nuts. You're obviously doing just fine on discretion and it's best to keep it that way.
FWIW, I am short WFM from 80.61. Just another opinion that it's time to get out.
I got it your point. You think I was treating this is binary options where the options would expire right away and I receive the full expected premium. That's where you're going. I see, good point.
I wasn't going there though. Why didn't I put a 34/39 call spread instead if I felt 15% to $39 was very likely? I used a lower spread to give me the wiggle room to make it possible to get a target of $4.00 on the spread. First of all, most price action earnings play will give you the jerk move (on upswing in price, the shares will jerk lower at the open before making an attempt at highs of the day). I played 34/38 spread to lower initial risk, because sure the long calls are great if we all knew AKAM will keep on going, but that's not the case. When the shares open, I expect a jerk move to leg out of 38, then on the rebound take out 34 longs at the higher price. Same way I did it with NFLX just weeks ago, same way I did it with MA.
Of course, for a first timer, it's hard to see the difference between the risk of a long call and a spread, given the parameters of the trade, which includes AKAM options at high IV, and data showing confidence that AKAM at $38 (on positive earning report) is close to 100%.
Any of those parameter change, and the whole play is out the window. Were AKAM's options expensive? For pre-earnings, it I consider options expensive if the stock moves 10% and your options do not show 100% return in intrinsic value. So with AKAM at $34 and 10% move putting it at $37.40, the AKAM feb 34 calls would have to be below $1.70 for me to consider options at Fair value or lower. Sure, all this is not conventional, but test them out, it's working. If it only worked for 1-2 trades, then those trades should be considered outliers only, but I've put in 6 spreads over the past 8 weeks or so, and it has worked to my advantage over just long calls. It gave me a better percentage gain per trade if both, the long option on its on and the long position from the spread, were closed out at the same time.
As for WFM, I still hold the calls....I made $300 on the 77.5 calls when I switched from 77.5 to 80 calls yesterday. And with $700 risk on the 80 calls, my net risk is only about $400, by which gains in AKAM has more than covered the risk. I consider WFM a free trade here.
You might make money on WFM beyond next week's expiration, but I think we see WFM at least above $78 for quite sometime before a big reversal. If you were going to play a short, why not short one that has been week during this rally? OPEN comes to mind.
