Noob Stratergy Question

Discussion in 'Options' started by queensny, Jul 13, 2010.

  1. queensny


    Hello All.

    My question related to when one sells a naked call option.

    What I currently own are: AAPL Aug10 Call Options $260.
    (I am currently down around 30% on them because of last two days)

    I was thinking of Selling Aug10 Call Options $280.

    I understand I would be limiting my upside if earnings were to explode but at the same time I am reducing the cost of my overall trade and somewhat protecting against the stock falling if the price drops.

    What I currently have

    10 AAPL Aug10 Call Contracts @ 12.70.
    (Current price is around $10.

    I can probably write $270 calls at $4-5 depending on how good of a day tomorrow is.

    Any thoughts on this? Not asking for feedback on AAPL stock but do you guys see this as a good methodology?
  2. MTE


    What you are proposing is called a long vertical call spread (aka bull call spread). You can find loads of info on this strategy on the net. Since you have an unrealized loss on the long call, selling the higher call now wouldn't give you a risk/reward ratio as good as if you were to buy the whole spread now or back when you bought the call. However, as you have pointed out, you do reduce the risk and at the same time give up the upside.

    I think the more important question is what was your plan when you bought the original call?
  3. gobar


    looking at aapl chart it looks like H&S pattern which is bearish

    but 265 is possible before earning
  4. Market up, and your calls are down?

    A call buyer needs first to beat overall market, and if right needs to beat time decay, and if right the continuous running away of the strike if it is out of the money. A tough nut to crack.
  5. AAAARGH, tj, please stop... My head hurts.

    It's what MTE sez.
  6. +1 ---> AAAARGH, tj, please stop... My head hurts.

    +1 ---> It's what MTE sez.
  7. As far as I know, the term "naked" applies when you do not have an opposing long position (which you do). Just FYI.

    In my opinion, it'd be better to lighten up on your position (say half) rather than selling the spread on the entire thing. If you want to see how it plays out, keep a couple and sell some 270s and some 280s. Even with the 270s (currently sitting around $6.70), you could still end up down 50% on the trade.

    Yeah, AAPL could pop, but the market has had a bit of a run up recently, so it's probably due for a bit of a pullback (which AAPL may or may not join), which compounds your current exposure to time decay of your position.

    Typically I don't like to buy options with less than 6 months out (and conversely, I don't typically sell options out more than 1-2 months).

    My $0.02.