Long a 90 call & Long a 100 call??

Hi, ive only just started looking into options and i was hoping someone could clarify something for me. The following picture is taken from Natenbergs book.

<a href="http://imgur.com/lL0y3ZC"><img src="http://i.imgur.com/lL0y3ZC.jpg" title="Hosted by imgur.com" /></a>

Am i correct in assuming the diagram is wrong and it should be

Long a 90 call at 6.65
Short a 100 put at 3.35

If i am incorrect, could someone please explain to me why? I was under the impression that being long a call meant u made money in a rising market. short a call meant u lost money in a rising market.

Thanks for your time.

 

no, the book is correct. If you were short a put, the lower left of the graph would not not have a limited loss until the stock gets to zero.

 

Hey, thanks for replying. Im still a little confused though. Ive drawn a diagram of what i had understood a
Long a 90 call @9.35
and
Short a 100 call @ 2.70
meant. Are the diagrams correct or have i misunderstood something.

<a href="http://imgur.com/LQ1GRQp"><img src="http://i.imgur.com/LQ1GRQp.jpg" title="Hosted by imgur.com" /></a>

 

Your diagrams seem correct, as are Natenberg's...he has just combined the long call and the short call into a long call spread. Check out pp. 202-211 where he covers vertical spreads in detail.

 

Thanks very much for clarifying that.

 

1) (-9.35) - (-2.70) = -6.65
2) (100-90) - 6.65 = +3.35
3) Those diagrams are only valid at expiration of the options. They can fluctuate wildly in the interim. :eek:

 

You are correct in your understanding, but a little off in combining the two call positions.

Long calls do make money in a rising market - short calls lose money in a risking market. Correct.

But your call at a lower strike (the 90 struck calls) will make money at a faster rate than the call at a higher strike (the 100 struck calls) lose money.

The max gain on the trade is the difference of the two strikes (100 - 90 = 10), minus the cost of the spread (9.35 - 2.70 = 6.65). This comes out to 3.35.

Just a side note - not the greatest risk/reward trade because you are risking 1.98 to make 1.

 

But never more than the lower (-6.65) or upper (3.35) bound in general. You may see it a few cents above and below but the spread is locked on how much you can make/lose.

 

Yeah i had understood it that -6.35 was the max loss you could encounter throughout the trade. How does this fluctuate + - a few more cents?

 

hey, i amm also reading naternberg's book currently.

its surely alot of absorb but its the best book on options out there!