Last Week

Discussion in 'Options' started by DOMS, Oct 16, 2007.

  1. DOMS


    I'm new to this forum (Greetings!), and I'm new to options, so I imagine that I'll ask some of the common stupid beginner questions, but please be gentle. :D

    I came up with a very simple strategy and and I wanted to know if it is workable in the real world.

    The one that I came up with is to buy 1 OTM call (for example) and sell 2 OTM calls a week from expiration.

    If I did this with AMZN, it would work out like this. I expect the stock to go down and come no where near these calls. Keep in mind the current price is 90. So the short call is $5 OTM.

    Sell 1 AMZN Oct 95 call @ .65
    Buy 1 AMZN Oct 100 call @ .18

    That's a credit of .37 per contract, or 37 dollars. Instead of doing 1 contract, do 5. So the credit would be 185 (less commission and slippage). But get this: since you'd never buy to close, you'd only get the opening commission charge and slippage! So that'd be 185 - 10 - 25 (commission & slippage). So you'd get 150 net. That doesn't sound like much, be consider you'd make this much in less than 5 days. The Oct calls expire this Friday.

    I know this probably violates some basic principles, such as not owning an option in the last 30 days due to increased theta decay, but it seems sound.

    So, what might I be missing?

    Thanks for any help!
  2. The short answer is that you are placing a trade that has a high probability of providing a low reward (37 or 47 cents, depending on which typo you go with). But once in a blue moon you're going to have an adverse move and could lose up to $4.53 per contract.

    Things usually work... until they don't.

    Also, if you sell 1 AMZN Oct 95 call @ .65 and buy 1 AMZN Oct 100 call @ .18, there's no $25 slippage if the calls expire worthless.
  3. MTE


    You are a bit inconsistent in your post. First you say:

    So, that's 1 long call and 2 short calls, which is a ratio spread. However, then you say:

    That's 1 long call and 1 short, which is a short vertical spread.

    Anyway, assuming you meant the latter the question has already been answered.
  4. If you can't buy the shares outright at the short-call strike price, your brokerage firm may not let you do the trade. Consider trading index options instead that are cash-settled instead of being deliverable.
  5. DOMS


    Thanks for the reply, guys!

    Sorry about the mis-matched strategies. I wrote it hastily at the tail-end of my lunch.

    And nazzdack, thanks for the tip about trading indices.