1x2 Call Ratio Calendar Spread/ bullish option strategies

Discussion in 'Options' started by eagle4x, Aug 28, 2013.

  1. eagle4x


    My first post here, and I'm requesting some advice. I am looking to trade options on stocks. The stock picks are from various sources such as Motley Fool's Million Dollar Portfolio, MF Stock Advisor/Income Investor, Magic Diligence (under valued cherry picked stocks based on Joel Greenblatt's Magic Formula Investing), Sabrient Systems, etc. I'm confident based on the excellent track record of these services that I have a good basket of stocks to choose from for option trades, which I want to trade because of leverage opportunities. However, my dilemma is finding the best bullish options strategy. I'm not a beginner trading options but no expert either. I am using an options screener to help find trades for the stocks I select and the best strategy. My main objectives for an options trade are the following:

    1) Unlimited profit potential
    2) Capped risk (< $500)
    3) Probability of profit (>51%)
    4) Relatively low break even (on average no more than 5 to 6 pts.above/below stock price but flexible for more volatile stocks).
    4) Front mo. expiration at least 60 days out, up to 2 years out, *I'm not a day trader).

    Using an options screener, I think I have found a strategy that meets my objectives - it is called a 1x2 call ratio calendar spread.

    For example, I'm considering a trade on Facebook. After I checked on 1x2 call ratio calender spread for FB, one of the choices available (out of many showing), I chose the following along with the results of the scan:

    S1 11/13 41C @ 3.28
    (IV = 45.8%, vol = 96, delta -52.58%, gamma -4.6%, vega -7.5%, theta 2,2)

    B2 02/14 46C @ 2,24
    (IV = 40.9%, vol = 323, delta 36.27%, gamma 3.62%, vega 9.5%, theta -1.4)

    Entry Debit = $120
    Max Profit = Unlimited
    Probability of Profit = 57.94%
    Max Risk = $-120
    Downside BE = $38.76
    Upside BE = $38.76

    Delta = 19.96
    Gamma = 2.642
    Vega = $11.46
    Theta = $-.57
    100 day SV = 52.36%

    I realize there is no free lunch with options trading, but the above results seem too good to be true, esp. with the low BE point. So I sent a question to the site admin. of the options screener asking why the BE less than the stock price because it should be equal to the difference between the strikes + the debit paid - his reply was:

    "The breakeven occurs at expiration in 79 days (front mo. option)

    When you are above the breakeven in 79 days
    then you will really be above the breakeven.

    Meanwhile - statistically anything can happen and
    it is 50-50 as to if you will still be above or below the BE in 79 days"

    I also asked about using the 1x2 call ratio calendar vs. other bullish option strategies, and his reply was:

    "The 1x2 Ratio Calendar Spread is okay but
    has IV risk not apparent in the risk chart
    but is clearly shown in the IV chart where
    the black profit like has a slope to it

    You should try to enter a trade in a stock where the IV will
    likely not go down and may go up and is currently on the low side"

    The admin. will not offer any add'l advice for options strategies, so I signed up for this forum to get input for other bullish option strategies that meet my objectives above. I am not interested in:

    - buying calls (high BE points/time decay).
    - buying stocks or LEAPS/selling covered calls (too much capital, caps upside).
    - writing synthetic longs (ties up same amount of margin as buying the stock).
    - selling puts (if assigned, the position likely exceed my total risk goal per trade (5% - 10%).

    However, I would consider other strategies that have a capped profit potential, such as spreads as long as other objectives are met since if the trade is profitable at expiration, I could make a similar trade again.

    Please reply as to viability of 1x2 call ratio calendar spreads - is this as good as it gets, or is there something else better out there, and if so what?