Thoughts on long OTM SPY calls

[smile]

"IV for these 225 calls is about .11 vs about .16 for the ATM 200 calls"

Contrast these with the puts, where you have to go all the way to the 113-116 strikes to find similarly priced puts.

The IV for these put strikes is about .44 or about 4X that of the calls.

The delta is well below 1 for the 113-116 puts.

 

[smile]

Not surprisingly, SPY seems to be the best bet for this strategy of buying far OTM calls about 3 months out.

It's easy to forget that for these to payoff, we either need a decent rally OR almost any kind of selloff.

I looked at VXX, IWM, AAPL and SPY seems to offer the best reward to risk considering the parameters of price of the calls, delta, vega, IV, OI, volume.

 

[smile]

Vega for the Jan.2016 SPY 225 strike is about .12, the 215 its about .28.

So just about any vol. increase from a downside move would protect these calls.

IV for these 225 calls is about .11 vs about .16 for the ATM 200 calls

Looking at the greeks for the 225 calls, the delta is .015 and vega is .12.

So a $1 up move in price only $0.015 increase in the price of the option.

A 1 point up move in IV increases the option price $.12 or about 2X what was paid for it.

 

[smile]

A several point up move in IV seems likely over the next 3 months.

 

[NoVoodooHere]

Hello,

I'm currently looking at OTM SPY 225 calls for Jan 16. Right now these are going for .03 to .04.

Many S&P500 projections point towards high growth by the start of next year. Let's just arbitrarily say these end up worth $2. That's a 6566.67% gain. This $2 value could come from either surpassing the $225 mark, or volatility in some run up (correct me if I'm wrong)

This seems like a very high reward/relatively low risk route.

Given that much time it seems reasonable to expect growth and maybe some quick rising catalyst at some point. Barring the S&P500 dumping like crazy consistently over the next few months and these expiring at $0, is there anything I'm missing?

I have a thought... You will get crushed, pulverized, ground to dust.

 

[prc117f]

nothing wrong with throwing 300 bucks on that trade. if its just 1 dollar ITM out of sheer luck you could have a 10K profit.

or lose 300 bucks, but use it as a tax write off. You dont get that with lotto tickets.

 

[Siembra NBIF]

I wouldn't take a strike that is that far (225). With the close today breaking resistance and volume growing, my take is 210 as a target in less than a month. So my recommendation is some Dec 2015 calls, strike 210 if you really want to be speculative, or strike 202 if you want to be safe with theta. This game is about constant gains, not big gains sporadic gains.

 

[smile]

"I'm currently looking at OTM SPY 225 calls for Jan 16. Right now these are going for .03 to .04."

These calls have done well, not because of any IV change but because of a nice SPY uptrend.

The IV has hardly changed.

 

[VTS]

nothing wrong with throwing 300 bucks on that trade. if its just 1 dollar ITM out of sheer luck you could have a 10K profit.

or lose 300 bucks, but use it as a tax write off. You dont get that with lotto tickets.

There is something wrong with it through. Successful trading strategies aren't one offs. In order to grow a fund you have to do it consistently for longer periods of time.

You can't just say oh it's only 300 bucks, because that doesn't account for all the other times you're going to have to do these same types of trades in the long run in order to finally get one that pays off.

And if you've studied option trading, you'd probably already know that betting on 2+ SD OTM moves is a losing strategy in the long run.

So why even bother with this trade? If it's a one off, it's not worth it. If it's going to be repeated many times in the future, again not worth it.


Just stick to a high number of occurrences of high probability trades, and let statistics be your friend.

 

[Victory5]

Based purely on volatility the probability of SPY closing above 225 within 91 days is about 6%

Also, if SPY increases that much in 90 days IV will go DOWN not up. After the recent market drops IV is higher than usual, so you'll most likely lose time value during a major price rise.

Eh....the VIX is pretty low at this point, so I dont think you're going to get crushed as much as you might think. Sure if the market pops another 10-15% by new years, you're going to have the VIX a touch lower, but its not going to be cataclysmic for your vol considerations.

If you're buying puts with deltas that close to 0, you're going to be more worried about actually getting a move in your favor that slight changes in IV.