Hello, Sometimes I see a call on a stock where the at-money and out-of-money strikes both make sense. I could see myself buying both. That way if the stock goes up a little, you make some money on the at-money call. And if it goes up a lot, then the out-of-money call kicks in and you make money off of that one as well. And the out-of-money call is cheap. So it doesn't cost you a lot to participate in both of them. Does anybody do this?
1) It's a free country. 2) PLEASE don't work with live money, without first taking a goodly 6 months of options-oriented learning and heavy-screen paper trading. There are LOTS of fine resources available, FOR FREE.
Look at the silver lining. If the stock goes down then you will lose a lot less on one of the calls Take Tom McGinnis' advice. Also, buy a good option book and spend a summer (or more) with it,
1 Master futures first, easier to manage in term of risk control 2 You would be broke fast if you consider out of the money options are cheap. If they are cheap, there is a reason. 3 Better sell than buy options, except if you got excellent timing, so master futures first. CM
I am the other dumb trader that do that for the same reasons you stated. With the responses you received, I better go back and re-examine this strategy.
I would actually see this spread a lot on the floor. It is called a call (or put) stupid. Yes, not making that up. For example the broker would quote the Jan 2000/2010 call stupid. Always thought that was funny. I actually enter this every now and then. When I get a good sale on a specific option, I will buy the "stupid" around it and end up with a butterfly. I tend to get a better fill entering it as a spread instead of buying each leg individually.
OK I am stupid. It is more expensive (higher total extrinsic premium paid) to buy 1 OTM and 1 ITM than 2 ATM contracts. But if the underlying makes some decent moves, the payout of 1 OTM + 1 ITM is higher than 2 ATM. However, I have not done a Monte Carlo to see if the most likely expectancy gives the same outcome as my back of the envelop analysis. More comments from the pros and experts are welcome because I don't know what I am missing.
The only way it makes sense to buy them both is if they have the same IV, otherwise just buy the one with the lower IV, as IV differences in the same underlying reflect the relative over/under-pricing of the option. E.g., if we assume that the ATM SPX option is efficiently priced, meaning that over many trades, buying the ATM results, before commission and slippage, in breaking even, then buying the options with the higher IV - usually ITM for calls and OTM for puts - would result in a loss. This explains why selling OTM puts and buying OTM calls tends to be profitable when done with proper money management.
I can confirm that this is, in fact, known as a "stupid" in the mkt... Sometimes, people also use "strip", but it's mostly when referring to options on different underlying securities.