Vertical spreads for directional trades

Discussion in 'Options' started by Optrader1, Dec 22, 2007.

  1. Are there any obvious disadvantages in using vertical spreads VS naked calls/puts? Other than the obvious capping of potential profits, of course.

    I am a swing trader (4-7 days) using options for directional trades. I am in no way an expert in options' greeks, and don't really want to be one. So please no flaming if what I am asking is obvious.

    I was just looking at buying 2XJan195/210 call spread on AAPL instead of 1XJan195(to get the same delta). I can only see advantages to this method, with lower BE, etc…Even if stock goes to $220, it is still more profitable than the naked call (naked call starts making more money above $224, and at that point you would have probably rolled). All for the same risk ($1,000 below $195). And I looked at 3-4 days after initiating the trade and it still looks better than naked.
    I rarely use those, what are the margin requirements compared to naked calls?
    I am just trying to improve my method by using spreads to limit the risk of loss of time premium/IV crush. Theta is 1/2 on the vertical what it is on the naked call, even with twice the contracts, so this is attractive as well.
    As most of these trades are held for 4-7 days, it seems that a calendar would not make as much sense as a vertical.
    As there other kind of directional calendars that would make sense? What are the implications in terms of margin?
    Thank you.
  2. You don't really need to know anything about the greeks for this, but a basic w**king knowledge will help somewhat.

    You're a swing trader. That means you want your option position to move with the stock. Ideally, you want lots of option price change (lots of delta) in the direction you predict, and not much price change the other way (lots of gamma). The simplest way to do that is with front month at-the-money long options. Calls if you predict up, puts if you predict down.

    Spreads are not well suited for swing trading, because they have a very small delta. The short leg loses value about as quickly as the long leg gains it, so you don't get a lot of profit when the stock moves. In effect, because you hold the difference between consecutive strikes in a series, you are trading the derivative (in the calculus sense) of the option. Delta is the value of a spread, and gamma is how it reacts to stock movement, roughly speaking. Its characteristics are completely different from unhedged options, and it is better suited to other purposes.
  3. I don't understand this. I can have the same delta I would have with a naked call just by adjusting the number of contracts. In the example I gave, I can achieve the same delta by buying twice the number of spreads.