Assumptions: - Call calendar, short term March-April. - Still profit in case of a large move. - Stock ready to move upward. - Stock is not a biotech, finance, tech., energy, etcâ¦. - Make theta close to zero. Details: SUNRISE SENIOR LVNG (SRZ) Price: 26.30 Sell: Calls Mar. 2008 strike: $30 (0.90-1.00) Buy: Calls Apr. 2008 strike: $22.5 (4.80-5.20) Long calls already $4 itm. I there anything wrong with this selection and my reasoning. Thanks,
What if the stock goes down? The short call will not hedge enough. If I were you I would use options from same month if I use an ATM vertical (this way all what is left is intrinstic value of lower call. I would better go for OTM bull put spread. Probability of success is higher and bid/ask spread is lower. Make money even if the stock does not move an inch by expiration. If you are sure about the move and vol is high, place a butterfly with body at where you think the stock will land. butterflys are very cheap, but I would typically use this for violent moves.
Mark I would say that the vol skew is not in your favor on the selected strikes. Your April ITM call is at 53 IV (what you are buying) and your March 25 is at 50IV. Earnings are going to report 2/25 so if you are bullish you might go ahead and buy an April 25 call in the next week or so THEN before earnings (IV should rise) sell the March 30 creating the diagonal with the vol skew in your favor. You have to watch to see if the rise in vega is offsetting the loss in theta. The other choice as mentioned above is a fly or condor...you could leg into by buying the April 25/30 now and if the stock moves up to 30 sell the 30/35 spread. GL ps.. your assumption that its a calendar is not quite accurate..you are proposing a diagonal so your risk is higher than if you were actually doing a calendar.