What's wrong with this options strategy ?

Discussion in 'Options' started by Avantivaylan, Oct 5, 2009.

  1. 155 AAPL Jan 2011 calls are trading for 50.90 ( ask )

    160 AAPL Jan 2011 calls are trading for 47.30 ( bid )

    If I buy the 155's and sell the 160's, I'm out of $360 for every pair of contracts.

    I keep these (almost ) to expiration. Assuming AAPL is at $200 on Jan 17 2011, the values of these options would be:

    155 calls are worth $ 45

    160 calls are worth $ 40

    Closing out the above positions will net me $ 500 for every pair.

    So am I correct in saying I made $ 140 in profit for every $ 360 I put in ?

    What else could go wrong ? Thanks for reading
  2. erol


    Worst case, you lose the money you put in.
  3. Under your end price assumption, that is correct. A more general statement would be that your maximum gain is $140 and your maximum loss is $360.
  4. Of course, AAPL could take a spill. The previous poster is correct-- max gain = 140, and max possible loss = 360.
  5. To directly answer the original question - there is nothing "wrong" with the position, assuming that's what you actually want to do.
  6. MTE


    Just to add to what others have already said, this strategy is called a long call vertical spread, aka bull call spread.

    Given that the calls you are considering are ITM, you may wanna consider selling a put vertical with the same strike prices instead (aka bull put spread). I.e. you would sell a 160 put and buy a 155 put. The risk/reward would be exactly the same due to the box spread arbitrage. The only difference is that the puts are OTM and would have better liquidity and tighter bid/ask spread.

    Another thing to consider is that a vertical spread needs time decay to widen out to it's maximum profit and with more than a year to expiration time decay in these options is minimal so you are really taking on all the risk of the stock moving against you without a prospect of getting compensated in the near future. Generally speaking, when you buy ITM verticals/sell OTM verticals you don't want to go further than 45 days out as beyond that point time decay is minimal.
  7. Many thanks to all of you. I'm intrigued by MTE's suggestion to put on a bull put spread instead.

    <quote> I.e. you would sell a 160 put and buy a 155 put. </quote>

    Question - wouldn't that increase the amount of margin on my account ?

    Right now putting on the bull call spread is not affecting my margin.....

    Thoughts and suggestions ...thank you
  8. MTE


    Yes, a bull put spread would have a margin requirement, but it would be pretty much equal to the debit you pay on the call spread. That is, if you pay 360 for a call spread then you'd most likely be able to sell a put spread at 140 or thereabouts, hence your margin requirement is 500-140=360, which is the same thing.
  9. rchstrmn


    Classic risk vs. reward. What is the max gain versus the max loss? What is the probability of success? And is it worth tying up your money for that amount of time to realize the possibility of a profit?