Dilegent don't sweat it ur comments are welcome.... I've been in this business long enough to know that NOBODY really knows what the hell they are doing. We make our living off of probability and managing risk. Trust me nothing anyone of us "thinks we know" about aapl stock price is going to make any difference to the results. We are risk managers thats it, that's all. Happy trading.
I understand the bear spread, you buy a put(call) with a higher strike price and sell another put(call) with a lower strike. This limits your upside profit and risk, but I donât understand how time is working for you?
vert spreads are still short theta, even though not as much as naked positions. this downside of course can be offset by using additional leverage (since max loss per spread is defined).
BEAR Call Spread is a bit different from a Bear Spread. BCS is a credit spread, while a Bear Spread is a debit spread. In a credit spread, you RECEIVE money for entering the trade, instead of paying. Let me illustrate. In this BEAR Call Spread, we are doing the following: sell one AAPL Apr07 Call with 95 strike buy one AAPL Apr07 Call with 100 strike (you can do multiple contracts. I put one in there to indicate this is an equal-leg spread.) This trade is entered as a spread order. For executing this order, we receive a credit of $1.40. We don't really care what price the options are trading individually, the broker looks after that, as long as the offset results in a credit of $1.40. For illustration purpose, let's say the 95c was sold at $2, and the 100c was bought at $0.60, thus giving us a credit of $1.40. For illustration purpose, let's say we enter this trade when AAPL was trading at $94. AAPL can fluctuates at any price it wants between now and expiration. AAPL can trade higher. AAPL can trade lower. But for whatever miraculous reason, AAPL finishes trading on expiration date (April 21, 2007) at exactly $94, the same price when we entered the trade. What happens to the BEAR Call Spread we have? 1. the 95c will become worthless because the strike is above the stock price. 2. the 100c will become worthless because the strike is above the stock price. What happens to the credit we received? ans: It is all ours to keep. What is this Theta thing? The 95/100 options are OTM options. The credit we received are ALL time values. There is NO intrinsic value in the cost of the option. Time value decays with the passage of time... until it worths ZERO at expiration. There is only ONE guaranteed profit in trading, that is -- Time Value DECAYS EVERYDAY. Thus, when the time value decays, we say time is working for us.
Thanks, that makes sense! Also, i think the 95 call should be covered because if not, you're screwed if the 95 < stock price at expiration < 100?
the long 100c acts as a cover for the short 95c. we get to keep the full credit of $1.40 if AAPL finishes at or below the lower strike of $95 on expiration day. IF AAPL trades above the lower strike of $95, the 95c becomes ITM, and we have to give back whatever the difference. The BE point is ~$96.50. i.e. if AAPL finishes at $96.50 on expiration day, we have to give back the credit of $1.40. We do not make any money, nor lose any. The maximum risk (i.e. loss) is when AAPL finishes at or above the upper strike of $100 on expiration day. Both 95c and 100c beomes ITM/ATM. If that happens, - and if we our stops did not kick in, - and we are still holding the positions, our loss will be $3.60. The profit/loss question is - will AAPL restest the top at $97 before April 21, 2007 ?