I plan to run the following question I am asking through TorS OnDemand feature, to see how much price has to move on the stock with X amount of time passing, in order to buy to close the short call for " BreakEven " and thus be Long just a regular Call ( which is my sole intention for looking to employ a BullCall / BearPut spread )
I have attached 2 screenshots, showing an example BullCall trade on YHOO
The stock was trading at $49.97
Buy the JAN $48.00 call
Sell the JAN $50 call ( ATM )
about 30 days to expiration
Debit = $1.17
My questions please are....
1. The Grid shows that after 2 days and the stock going up .36 cents in price to $50.33
It shows a profit of $6
So would this mean, that I could buy to close the short call of $1.17 at this point , and still be up $5.83 on the trade AND..... Long the $48 call " Free and clear " ?
Maybe my interpretation of knowing the " WHEN " I could close out the short side of these spreads is misunderstood
Would an Options calculator let me know , almost to a T , the point of which during a BullCall spread that I can close out the short side ?
The amount the stock moves in price and the time that has passed and how far out to Expiration are key factors in answering my question I'm sure
Thank you for the help and input , really appreciate it
The P/L is for the whole spread. Generally for me if I put it on as a spread I take it off as a spread. Just taking one side off completely changes your risk profile.
I will occasionally buy back the short side if it gets down to a nickle or less just to free up the position. If I do that it is because I basically conceded the loss and just leave the long to expire worthless or maybe it has a 3-5% chance of gaining in value on some drastic move of the underlying.
Lets take a high priced stock like AMZN , trading for around $525
To buy a regular Long call of say the $525 ATM or even the 1 strike OTM , say the $530 call with 45 days to expiration,
would likely cost around $20 or so
Quite a bit of money to buy 1 lot ( $2,000 )
My thinking is , trying to find a way, to still play the Long Call side of the higher priced stocks ( AMZN in this example ) , but do so for " cheaper " by placing a debit spread trade , to where you buy the ITM call and sell the ATM or even buy the ATM and sell the just slightly OTM strike
I know that by placing a Debit spread trade, that we'd be giving up some of the profits.... i.e. the stock moves in are favor by X amount of dollars, and we weren't able to capture any of that move because we're in a spread, BUT..... if the stock makes a nice move within the first 5 days after we place the BullCall spread AND it goes above the sold strike, could we then buy to close the sold portion of the trade " quickly " , while yes, giving up some of the move in the stock if we had just bought the Calls out right , but now we got into the trade " cheaper " since we placed a BullCall spread, and are thinking before we ever put on the trade, was that the stock was going to make a nice move upwards ( 10% or move is are projection for the stock )
I'll have to get on TorS and run backtest through the OnDemand feature,
and see the point at which the sold call could have been bought back for " breakeven " and how many days had passed and how much the stock moved up in price, for this buying to close out the short side of the spread, could have taken place
Ye spreads work well to reduce capital requirements for trading options. When I look to create an ATM spread I will first consider the Implied volatility. If the IV rank seems high I will prefer to sell a put spread if I am bullish...and if it seems low Then I might consider buying a call spread. Directionally they are the same but when IV rank is high you usually can collect more premium and also will gain from any contraction in volatility and allows you to take both strikes further OTM and still collect enough premium to make the trade worthwhile. I usually look for 1/3 the width of the strikes at a minimum. Where an ATM spread will have a probability of profit around 50% going OTM where you collect 1/3 the width of the strikes generally increases your probability of profit to around 70%.
Then by doing as you suggest...take profits early when given the opportunity...you further increase you probability of profit over all....I generally look for cashing out at 50% max profit.
Always remember...when you buy a spread your total risk is what you paid and your max profit is = to the width of the spread minus what you paid. And when you sell a spread your max profit is the credit you received and your max loss is the width of the spread minus the credit received.