bull call spread should be in profit but isn't. please explain

Discussion in 'Options' started by frankr, Jan 24, 2006.

  1. Yeah, if he keeps it untli exp. and is still a lousy trade imo.
    I'd rather buy premium on otm calls in goog.
    #11     Jan 25, 2006
  2. Buy1Sell2


    This is one of the reasons that I opted early on not to use a vertical bull call or put spread. Try it in the Soybean market sometime with limit moves and see how long you have to wait to collect the gravy.
    #12     Jan 25, 2006
  3. ra1


    If you entered the trade on 1/20, goog ranged between 394 and 440 and so it depends where you got filled - if your fill was at market you may have paid maximum premium on your spread on that day. Since goog is now at 443 (the approximate price you may have been filled at on 1/20) you would have lost a tiny bit of time value as well as the bid/ask spread slippage but you certainly wouldn't expect to be profitable, unless iv dropped substantially (it seems your position has a slightly negative vega and iv seems to be still climbing). So, if iv goes up faster and further than your delta, your position will start to lose (vega -1.2, gamma 3, theta 0, gamma 0).
    All the best.
    #13     Jan 25, 2006
  4. frankr


    thanks everyone for your suggestions. i thought i understood options at a reasonable level but apparently not. i don't know about the greeks other than the deltas and even with deltas i just know what they stand for but don't know what to look for. i don't know much about volatility factoring into the trades. i'm already learning a lot from your responses. i think i will cease my trading for a while and study more. someone already suggested a book which i plan to get.

    but as of this trade can someone suggest my best course of action now to minimize my loss? again I'm in the $440-$450 bull call spread expires Jun2006. it cost me $490 to enter. should i just exit the trade? the $450 call is up $2.5 and the $440 is up $2 as of right now so I'm in the hole $100. but if i reverse the trade the bid/ask price would only give me around $350 per contract. that is a loss of $140 (490-350). should i just exit the trade, take the loss, and study more?

    by the way right now premarket trading brought the stock to $451 which supposedly should give me my max profit right? im using optionsxpress. is there a way to excercise a long call AND sell the underlying stock at market price all in one transaction? i don't want to exercise the call only to have the stock price drop by the time i can sell the stock. also i dont have the money in my account to buy the shares. i would like to excercise the long call for $440, sell the stock for market price (which is $451 right now), then I'll just buy back my $450 short call. is this possible? please help!

    thanks again to everyone who responded and who will respond. i appreciate it.
    #14     Jan 25, 2006
  5. MTE


    Even if the stock is at 450 now you won't reach the max profit because there's too much time value left in the options. Basically, as it has been mentioned before, you'll have to wait till expiry to get the max profit or if you're lucky enough and the stock goes really deep ITM.

    Why would you exercise the 440 call!? If you do then you would lose all the remaining time value, which is quite considerable given that the options have quite a bit of time left.

    If for any reason you still wish to exercise your call then you can just short the stock now, at the time you request the exercise, that way the short stock will be offset by the exercise and you would have essentially locked in the current intrinsic value.
    #15     Jan 25, 2006
  6. ra1


    Hi frankr
    First, relax. Your max risk is what you paid for the spread and
    second, the stock is moving in your expected direction.
    Third, are you still bullish? If so then hang onto your position. If not and you are now bearish, then simply close the spread (sell the calls you bought and at the same time buy back the ones you sold - if you're not sure how to do this then check with your broker - iow you need to close the trade the same way you opened,i.e. as a spread).
    Ok, now, back to basics. Before you open a trade you need to have your plan - exit stops (profit as well as loss). The stops need to be a bit loose because of the slippage issue with options, but you might want to pick, say, a 50% stop loss and a 100% profit stop (this is just an example). Based on the loss stop you can work out how much of your total capital to put on this trade. For example, your money management might dictate that you only risk 2% of your bank on a single trade, and of this 2% you are willing to lose half (50%). So, for a $10000 account you would take $200 and buy your spread (e.g. each spread costs $20 so you would buy 10 and close the position if its value dropped by 50% or went up by 100%).
    Now, you need to work out which spread you want to buy and for this you need to model it so you can compare the different spreads and how they will behave under different scenarios (price up/down, time decay, iv changes). As MTE mentioned, time decay is an issue and your spread won't reach max value until expiry (no time value remaining) or if there's a very big up move (which would basically have to put your spread so deep itm that virtually all time value is lost from it).
    Ok, that's enough from me.
    Don't despair, options are complex and take some time to work out, but you can do it if you stick with it - the hard thing (as another poster pointed out) is to maintain interest long enough for you to become proficient.
    Happy trading.
    #16     Jan 25, 2006
  7. frankr


    Thanks MTE. I have much to learn about options. I thought I understood them fairly well but I don't. I remember Optionetics teaching to get longer term options if doing debit spreads because there is more time for you to be right. I didn't know time value played such a big role. I expected the goog stock to go up quickly, within days. Should I have done an earlier expiration? So now I have a $440-$450 bull call spread and the stock hit $450. I should exit, shouldn't I? Because if I wait till expiration the stock can go down.

    I was asking if I should exercise the $440 call as a way to exit my position. Since I only recently began real money trading, and something like this (where the otm short call rises in value MORE than the atm/itm long call) never happened to me in my paper trades. So here I am in one of my first real money trades, and this happens, and my mind just goes crazy and I don't know what to do. So please forgive my ignorance. I'm trying to learn though. I'm going to get a book someone just suggested, on options volatility. I'm just looking for help on what to do with my position right now at this point.

    Thanks for your response.
    #17     Jan 25, 2006
  8. frankr


    Hi ra1. I was typing my reply to MTE when your message came through so I just read it right now. I appreciate your help. Thanks! My issue here is even though the stock is moving in my direction, my short call is rising in value faster than my long call, so I'm losing money. Yesterday the short call rose $2.5 while my long call rose only $2.4, so I lost $50/contract. This morning the short call rose $3.8 while the long call rose only $3.4 so I lost another $40. So the more the stock rises, if the short call keeps rising in value faster than the long call, I will lose more and more money. Am I right about this, or did I make a mistake?

    When the stock was in the $430s I was bullish. At this point I'm not sure what will happen because earnings is due next week and expectations are high. I believed the stock would hit $450 within a couple of days, and my plan was to exit before earnings came out. But things are going as planned just because the short call is rising in value faster than the long call.

    I am trying to relax and deal with this. But I do get a little panicky, I admit. This is one of my first real money trades and nothing like this ever happened to me before in my paper trades.

    Should I exit the position at a loss and save the remaining value of my position, and study more? There's no way to exit at a profit right now, right? Since the $450 short calls are rising in value faster then the $440 long calls.

    Hey, thanks for your response, and any further response. In fact, thank you to everyone that is responding and being patient with a new guy like me. I really appreciate it.
    #18     Jan 25, 2006
  9. frankr


    uh, I meant to say things are NOT going as planned in paragraph 2
    #19     Jan 25, 2006
  10. Buy1Sell2


    Just a thought, but I have never viewed vertical bull call spreads as a good short term play. This is the very kind of thing that happens with them and you end up feeling stuck in the position. Probably should have just bought the long calls without the short calls, but less of them to keep your cash outlay the same. --(I generally will not buy options)
    #20     Jan 25, 2006