option strategy

[happy trading]

i have only traded very basic option strategies, covered calls and puts and credit spreads. i do not have an in depth understanding of the greeks so i never tried anything complicated.
what i want to do is sell a call on an index such as the qqq and at the same time buy a call at around the same strike with a much later expiration. such as selling the the jan 2022 with the 336 strike for around 33 bucks and selling the jan 2023 with a 335 strike for 48 bucks. so if the index rises i am assuming both calls will rise but the short call will rise a liitle less due to faster time decay. can someone help me out exactly how this trade could work.
thank you

 

[happy trading]

the point of what i am trying to accomplish is to sell a couple of shorter term options to cover the cost of the long option so that eventually if everything goes as planned the longer term option will be paid for and then i can then let it run. can someone detail me why yes or not this would work?

 

[caroy]

the point of what i am trying to accomplish is to sell a couple of shorter term options to cover the cost of the long option so that eventually if everything goes as planned the longer term option will be paid for and then i can then let it run. can someone detail me why yes or not this would work?

What you're describing is known as a calendar spread if they are the same strike and different months if the strikes are different it is a diagonal spread. The idea of continuing rolling the front month is called a campaign calendar strategy as ideally you're left with a free paid for long option. You'll want to look into how changes in volatility effect the trade and ideally sell options with higher IV against options with lower IV. Hope this helps.

 

[happy trading]

What you're describing is known as a calendar spread if they are the same strike and different months if the strikes are different it is a diagonal spread. The idea of continuing rolling the front month is called a campaign calendar strategy as ideally you're left with a free paid for long option. You'll want to look into how changes in volatility effect the trade and ideally sell options with higher IV against options with lower IV. Hope this helps.

so say before the short call expires, the index goes up. what would be the most common thing to do? roll out the short and roll up the long to cover the cost of the short?

 

[caroy]

so say before the short call expires, the index goes up. what would be the most common thing to do? roll out the short and roll up the long to cover the cost of the short?

If it goes up but doesn't reach your strike just let it expire or buy it in cheap under $0.05 and sell another one further out. Say your initial position is short a 7 DTE SPY 405 call and long a 90 DTE SPY 405 call. At expiration or before buy in the short call and sell a new one further out. This is campaigning it as ideally after enough profit taking on the short calls that are being rolled or reestablished your now long the later dated option for free or close to free and then let it ride. Ideally a market that trends slowly up is suited for this. You could increase the odds by changing the strikes sell the 410 or 415 and be long the 405. Another way of doing this is referred to as a poor man's covered call where your long call would be deeper ITM with a much higher delta say 90 or +. costs more up front but can have a higher POP long term.

 

[happy trading]

If it goes up but doesn't reach your strike just let it expire or buy it in cheap under $0.05 and sell another one further out. Say your initial position is short a 7 DTE SPY 405 call and long a 90 DTE SPY 405 call. At expiration or before buy in the short call and sell a new one further out. This is campaigning it as ideally after enough profit taking on the short calls that are being rolled or reestablished your now long the later dated option for free or close to free and then let it ride. Ideally a market that trends slowly up is suited for this. You could increase the odds by changing the strikes sell the 410 or 415 and be long the 405. Another way of doing this is referred to as a poor man's covered call where your long call would be deeper ITM with a much higher delta say 90 or +. costs more up front but can have a higher POP long term.

thanks for responding. my question is if let's say i am short a front month 405 strike and long a back month 405 strike. then the stock shoots up to 500 before the front month expiration, the best thing for me to do would be to roll up the long in order to pay to close the short?

 

[HappyDays]

thanks for responding. my question is if let's say i am short a front month 405 strike and long a back month 405 strike. then the stock shoots up to 500 before the front month expiration, the best thing for me to do would be to roll up the long in order to pay to close the short?

Rule #1 - never allow your sold option to get in the money.
When price reached 400 you had to close out the full position, dont even wait till 405.

 

[caroy]

Rule #1 - never allow your sold option to get in the money.
When price reached 400 you had to close out the full position, dont even wait till 405.

Theoretically if it hits 405 your overall trade should be profitable anyway as you'd be making more on the long option at the 400 strike so you could take profits on the entire trade and then just reestablish a new position.

 

[HappyDays]

i am short a front month 405 strike and long a back month 405 strike

Theoretically if it hits 405 your overall trade should be profitable anyway as you'd be making more on the long option at the 400 strike so you could take profits on the entire trade and then just reestablish a new position.

Nope.......both his strikes are at 405, there is no 400

 

[caroy]

Nope.......both his strikes are at 405, there is no 400

presuming it would have been a diagonal set up with the shorter dated strike higher than the longer dated one.