Could someone tell me where the mistake is?

Discussion in 'Options' started by csabz90, Jul 20, 2012.

  1. csabz90


    Hello everyone,

    I am new to options trading and I have a question about something that has just came to my mind.

    I had a look at some FX options and found that if I buy an AUD/USD call with an expiration of 4 weeks from now, the premium I pay will be less than what I would earn by selling a weekly AUD/USD call every week until the long call expires.

    This way I could hedge my monthy long call option with 4 weekly short call options and earn more premium with the shorts than what I paid for the long one. This is obviously too good and simple to be true, I perfectly know that, but since I have just dipped my fingers in options, I would like to ask someone here to explain to me where I have made the mistake.

    Thank you guys!

  2. Not sure if I'm understanding you correctly, but the premium of the 4 short calls you're planning to write weekly will vary from day to day. Suppose you buy the call wich expires in 4 weeks and you write your first weekly call against it, and next the price starts dropping. You're long call will be in for a loss and writing ATM calls won't be bringing much money in.

    In case you wanted to go long the call and write 3 or 4 calls options against it you're taking on more risk.
  3. csabz90


    Yes you understood me correctly.

    Thanks for the answer, I think I get it now.