why long Bull Call Spread vs Call

Discussion in 'Options' started by cqm, Mar 4, 2012.

  1. cqm

    cqm

    Hello,

    I had a strategy involving far dated out the money long bull call spreads (long vertical)

    the max gain on such a thing is about 400%


    for some reason I forgot why I would do that versus just using a long dated out the money call LEAP


    why would one do an out the money long BCS vs a leap

    leaps with properly priced premiums are also usually 300-400% gains if they become "At the money" with plenty of time left, but they can CONTINUE gaining, unlike a long bull call spread, which is only 400% at expiration

    another con with bull call spreads is that you have to buy a ton of contracts, whereas each individual leap is pretty expensive.

    although a pro of a bull call spread is that the short leg is losing value and you can collect that premium and close some of the short contracts to buy more of the long contract at lower value.

    so many dimensions

    anyway, discuss? OTM long BCS vs OTM call leap
     
  2. you have pretty much summarized the pro's and cons..there is one more "option" a ratio spread...you might do that to off set the initial cost yet have a few contracts to run. Personally I usually will convert the long call to a spread to lock in some profit if my initial call starts to make money.
     
  3. Robwynge

    Robwynge

    One other difference is that spreads show greater profits with smaller moves than a ordinary call. If you look at the P&L diagrams, you'll see that you'll make more money with the spread up until a certain point, the "point of indifference," where you would do equally well with either the BCS or the call. Any upward movement in the underlying beyond that point makes the call a better bet.

    Of course, you don't know which will pay off better when you enter the trade. You basically have to decide whether you want a higher probability of making $X, or the lower probability to make $X+.

    For example, let's say you would make $1,000 if your BCS expires beyond the higher short strike. Now take a look at how much you'd make if you just owned the call and it expired at that same strike. It will always be less, assuming you have set up the trade so your risk is the same. Then go figure out how much further the underlying has to move to go beyond the point of indifference where you would also make $1,000 with your call. Do you like your odds?

    One other minor issue with the Greeks is that if your BCS trade goes you way and gets beyond the short strike, time decay HELPS you from that point forward. Not so with a call.
     
  4. EdgeAnalytix.net

    EdgeAnalytix.net Vendor

    is a good reason to use verticals instead of LEAPS and since Vega increases further out , it makes it even more important
     
  5. as you indicated,you can manage these trades as price moves, the bucs may offer more alternatives.....