a short call ladder

Discussion in 'Options' started by 0008, Sep 24, 2009.

  1. 0008

    0008

    from the chart it seems this trade is a sure win

    what is the trap?

    it is a short call ladder
     
    • a1.jpg
      File size:
      363.3 KB
      Views:
      171
  2. MTE

    MTE

    I love these "sure wins"!

    What you have is a short call vertical with an extra OTM long call. Your maximum loss at expiry occures if the stock is between the two long strikes (40 and 45). Sure it looks like a "sure win" right now, but as the time progresses the loss in the middle will be clearly visible. Also a drop in volatility will hurt you.

    Essentially, it's a call backspread with the two long calls separated.
     
  3. gkishot

    gkishot

    Isn't the PnL chart taken at expiration date?
     
  4. MTE

    MTE

    The fact that lines are smooth tells me that it's not at expiration. Besides, I don't need a graph to know what the position is and what the risks are.
     
  5. gkishot

    gkishot

    In this case no wonder the OP thought that this is a risk-free trade since the PnL chart shown is not taken at expiration but on some who knows what day.
     
  6. MTE

    MTE

    My point exactly.
     
  7. spindr0

    spindr0

    It's a graph of the position today. Net credit of $3.03 with a spread risk of 5 pts so maximum loss b/t 35 and 40 is $1.97

    It's not quite risk free. :eek:
     
  8. MTE

    MTE

    Max loss is between 40 and 45, not 35 and 40.
     

  9. The 'trap' is believing your first sentence has any basis in reality.

    Mark
     
  10. spindr0

    spindr0

    OOPS, my bad!

    Since I have your attention, here's another loony question (g).

    I'm gamma scalping stock against ATM long puts. Is there any advantage to using puts a strike ITM? They have a higher delta and less time premium so with those ITM, less TP would be paid out and decay would affect the position less.

    OTOH, with fewer ITM puts, the ITM risk graph isn't the standard balanced V. I know I'm missing something but I can't put my finger on it.
     
    #10     Sep 24, 2009