If I thought the S&P was going to 1125 by end of year, what call option to buy?

Discussion in 'Options' started by ang_99, Oct 6, 2009.

  1. Hester

    Hester

    No, a vertical spread would beat long calls. It is a much better strategy in this situation. The op thought spy was going to 112.5 but not much higher, which I tend to believe was his thought since he did not ask which strategy would be most profitable if spy reaches 120 or 130. If this is the case why would you not sell a call against your long call to finance it?

    If you just bought a long call, say a mar. $107, then he would risk $630 per contract. If, say 80 days after you bought the call spy hit 112.5, then you would make about $145. If spy didn't hit 112.5 until near expiration then you would lose about $77. (All these examples assume no change in volatility).

    Now if you bought that same long call, but financed it by selling a mar. $112 call, the situation changes. You would risk $242 and would make $73, 80 days after spread was bought, even though you risked much less. If you held to experation you would realise a profit of $257 dollars.

    So by just buying a long call you risk $630 and you actually lose $77 at expiration. For a return of -12%.
    Buy buying a vertical call spread you risk $242 and you would make $257 for a return of 106%. Pretty big difference imo.

    These were simplistic examples, there are probably better and more profitable ways of implementing a call spread or long calls, but as you can see the call spread will still be superior. You've gotta approach options in a way that emphasizes making as much as you can while risking as little as you can. Just blindly buying long calls is not how to go about trading options. Focus on your goals with this trade, where you think spy will be in the next few months (which you did), and devise a strategy where you can risk little to make a lot. This is what seperates the winning traders for the losing traders.
     
    #21     Oct 11, 2009
  2. Being smart isn't a prerequisite for success. Understanding the vehicle you're trading is.
     
    #22     Oct 16, 2009
  3. SPX's price is 10 times higher than SPY and is the same thing so you pay 10 times less commissions. Next you get a tax break on cash settled indexes like SPX verses ETF's like SPY, you file a 1256 contract for this, its not that hard to do. Now for your trade, this one is a butterfly, if you are right you can make 740 for 305 of risk. Sell by the 14th of December and take a vacation and take the next year and study and paper trade options.

    BUY +1 DEC09 1100 CALL
    SELL -2 DEC09 1125 CALL
    BUY +1 DEC09 1150 CALL

    [​IMG]
     
    #23     Oct 19, 2009
  4. Wow, I nailed this one. Couldn't get any more accurate.
     
    #24     Jan 1, 2010
  5. Tide31

    Tide31

    Bravo Ang, hope you bought them back then. Give us your 12/31/10 guestimate. Now is a good time to buy say a leap or Jan 2011 call. Almost a fact that volatilities jump at the start of a new year. I read this week that the AVERAGE increase in January for volatility was 40%. That would take us from VIX of 20 to almost 30 next month. Without the market moving too much a leap would increase in value as volatility expands. This would afford some protection in the first quarter while we see where the market starts out for 2010.
     
    #25     Jan 1, 2010