Someone on the Yahoo OptionClub group mentioned that he likes to buy calls and put a stop on them, as opposed to doing a spread. The downside is limited as in a spread, but the upside is not. He also puts stops based on where the underlying goes, which I didn't know you could do. Any comments on this?
Some brokers allow contingency orders such as selling the call to close when the stock hits a certain price. I believe Optionsxpress has this feature.
As mentioned, some brokers allow contingency orders on options. But that's no guarantee that you get a fill at that price. each strategy has its advantages and disadvantages. Options are about tradeoffs. My two cents is that calls with stops versus spreads isn't the key to success. Timing and direction is the primary issue. .
You'd still want to watch the option carefully. The call-option can lose more than you expect if there's volatility and/or time decay taking place independent of price movement in the underlying stock.
Even assuming that your stop is executed satisfactorily, neither trade has any advantage over the other, although they are very different. In the case of the long Call + stop, the P/L is dependant on the path the underlying takes, whereas the spread P/L is dependant only on the underlying at expiry. A simple example; Underlying 47.50 Long 45 Calls Short 50 Calls Long 47.50 Calls Stop in at 45 If the underlying traded into expiry thus 47.50 â 44.0 â 47.50 â 51.0 the long call would have been stopped out, whilst the bull spread would expire at maximum value. Of course you could always re-open the long call + stop when the underlying moved back to 47.50, but do that too often and you'll be killed with commission and the B/A.
I don't think that's a good example because you're using different strikes for the long call. It would be more appropriate if both positions were long the same strike. In terms of the OP's question about money management prior to expiration if the stock drops, FWIW, I think that the spread has a definite advantage. Since it costs less to open and loses less if XYZ drops, you can hang in there longer and benefit if your hypothetical reversal occurs.
Probably not a good example in terms of detail, and obviously vol skew would feature in deciding which strikes use. But the example holds good in highlighting the how path and expiry affects each position's profit / loss. I would also prefer the spread too.
In addition to options not trading in pre- and after-market hours and not opening for trading until 15-30 minutes after the stock market(s) opens they begin trading on a rotation basis: "Options are opened for trading in rotation. When the underlying stock opens for trading on any exchange, regional or national, the options on that stock then go into opening rotation on the corresponding option exchange. The rotation system also applies if the underlying stock halts trading and then reopens during a trading day; options on that stock reopen via a rotation." http://www.investors.com/learn/o.asp
I like this example and it shows very clearly the possible outcome of both trades. As mentioned earlier the example should have had the same strikes for the long calls, but that's a moot point.