Why the Spread Beats the Long Call

[Quanto]

An analysis at a point in time is correct for that point in time. Market changes, price changes, IV changes....

He is a teacher, you sir are a trader.

After a decade trading long single legs, I know who I put my money on.

I do have to qualify my statement: I am just an amateur retail, trading my own money, not a professional trading OPM.

@ironchef, let's assume the underlying spot was 151, and that all strikes around 150 in steps of 1 are avail, DTE was about 9 (ie. on last Wednesday), IV is about 44. Which strike for your sole LongCall trade would you have used in the said scenario? The same used strike 150 as in the example?

Just for orientation: here the current data: last Friday the underlying stock closed at 153.31, and the Call options are these:

 

[ironchef]

A big part of trading is comfort level.I happen to be a "spreader", though I lean toward ratios

My main point was the scenario analysis presented was narrow in scope,with the stock trading in a tight band. One could easily come up with a split strike fly and have a much nicer P and L table for FSLR trading between 150 and 160.

More to the point,I did run a simple backtest on the SPY over the last 10 years.It certainly wasn't exhautive,but it appears that 1 naked call outperformed the Vertical with the same long strike.Makes sense in a rip roaring Bull market.

To each is own,but I wouldn't be so sure 1 spread outperforms a naked call.

Which is why one backtests
..

I actually like OP because it pointed me to look at things a little different so I won't be too complacent.

And thank you for the coaching. I personally learned a lot from you. It was always a pleasure reading your posts.

 

[ironchef]

@ironchef, let's assume the underlying spot was 151, and that all strikes around 150 in steps of 1 are avail, DTE was about 9 (ie. on last Wednesday), IV is about 44. Which strike for your sole LongCall trade would you have used in the said scenario? The same used strike 150 as in the example?

Just for orientation: here the current data: last Friday the underlying stock closed at 153.31, and the Call options are these:
View attachment 336757

Thanks. I will take a look.

 

[taowave]

OP certainly provided food for thought.

IMHO, its very difficult to go against ones "comfort zone"...

OP doesnt love being naked long options and bleeding..

I certainly get that....

I actually like OP because it pointed me to look at things a little different so I won't be too complacent.

And thank you for the coaching. I personally learned a lot from you. It was always a pleasure reading your posts.

 

[IVolatility]

Just two minor typo fixes: should be "March 28" (due to market holiday on March 29), and "long 150 call and short 155 call".

Corrected, thank you for highlighting this!

 

[ironchef]

@ironchef, let's assume the underlying spot was 151, and that all strikes around 150 in steps of 1 are avail, DTE was about 9 (ie. on last Wednesday), IV is about 44. Which strike for your sole LongCall trade would you have used in the said scenario? The same used strike 150 as in the example?

Just for orientation: here the current data: last Friday the underlying stock closed at 153.31, and the Call options are these:
View attachment 336757

I won't trade any of those. I have very different criteria to consider if I want to place a trade, or not.

 

[ironchef]

OP certainly provided food for thought.

IMHO, its very difficult to go against ones "comfort zone"...

OP doesnt love being naked long options and bleeding..

I certainly get that....

It bleeds only if the underlying won't move or IV won't explode.

 

[taowave]

Not following you..
Are we talking long options??

It bleeds only if the underlying won't move or IV won't explode.

 

[ironchef]

Not following you..
Are we talking long options??

Yes, if the underlying goes up, my call option may not be bleeding premium, if IV explodes my option may not be bleeding premium.

 

[taowave]

LOL,I wouldnt know,my stocks stop going up as soon as my option is ATM

Speaking of call losing theta as the stock explodes,did you look at FSLR?