Mon, Jun 4 – How do you guys decide to leg into a spread as opposed to buying the spread all at once? – C
A couple of reasons including conviction, and timing, but the biggest is probably fear of too much premium on being naked long an option. If we feel the market is at an inflection point or a stock is about to join a market move we may decide to be naked long an option and try to leg into it. Or if the volatility seems like a good long and we don’t want to sell low vol as the other leg of the spread. If we’re not so positive on the exact timing of a move or we think volatility is too high to be naked long the option, even for a short period of time we’ll likely just spread it to start because we don’t want to be sitting there watching the premium decay while we wait for a move. So I guess like everything in options its a bit of a feel of multiple inputs all happening a once, but implied volatilities is a great one of those inputs in that it takes alot of the ‘feel’ guessing game out of it and almost forces you to spread the structure. -CC
Sun, June 3 – I don’t get about your FB 1×2 is that you said that if the price goes above 34, then your long stock would get called away. But if you only own 100 shares long and you have sold 2 calls then wouldn’t you need to own 200 shares long? – BW
Maybe this is an easier way to think about it. If you own 1000 shares of FB at current levels at 27.70 and then you bought the Aug 30/34 1×2 call spread for .10. You would buy this call spread 10 contracts of Aug 30 calls and selling 20 contracts of the Aug 34 calls. that way you are long 1000 shares, then long 10 of the Aug 30 calls (the right to buy 1000 shares at 30 or higher) and then you are short 20 of the Aug 34 calls, the right to sell 2000 shares at 34. You are not naked short any calls, the whole position is covered.
So if the stock was 30 or higher, you would have the profits of the stock and then the difference between the Aug 30 call you are long and the Aug 34 call you are short. If the stock is 34 or higher, your long stock is called away from 10 of the Aug 34 calls that you are short, BUT then you would have the profit of 3.90 of the Aug 30/34 call spread that you are long (in the trade that i laid it the 1×2 cs cost .10).
You would have the profit of the stock that you own up to 34 and then you can add the up to 3.90 in gains of the Aug 30/34 call spread that you own, so in reality if the stock was 34 or higher you would effectively be selling the stock at 37.90. -Dan
Fri, Jun 1 – Given the historic low 10 yr treasury yields, I am beginning a contrary position. I have starting buying the 15 calls , Jan 13 expiry, on the TBT. I can’t imagine the yield going more than 25 basis points lower, unless Europe goes completely down the toilet or a major news event out of the Middle East. I know people have been carried out on stretchers trying to short the longer dated treasuries. Am I crazy to plow money into this trade? What do you think? – LK
I am still long TLT myself, and I do think Treasury yields can go lower. Remember, people are not buying Treasuries because of the yield, they are buying them because they want a safe place to put their money, the dollar is still the reserve currency of the world, and I don’t see that changing anytime soon. But I am frequently wrong, so just for what it’s worth. -Enis
Fri, May 25 – I’ve been frustrated on the euro trade until recently. I’ve been using calls on the EUO, do you think put spreads on the FXE is a better way to go? -LK
I’ve been using either UUP long calls or FXE long puts. The UUP is a separate trade because it depends on the Japanese Yen and British Sterling (other currencies are minimal in the basket), but the implied vol is cheaper, and it is still 57% Euro composed (and I was expecting more weakness in the Japanese Yen, which has not happened). But the cleanest way to express just a Euro short position is FXE puts in my opinion. Be careful on your strike and maturity selection because you don’t want your option to decay too quickly before the Euro makes its move. -Enis
Tue, May 29 – What’s the most important thing you look for when finding a good trade and knowing if the option price is over or undervalued? -DS
The most important thing I look for in my options trades, it’s usually determined first by a stock that looks like it could have a big move coming soon, for whatever reason (fundamental or technical), and then also an options structure that gives me a good risk/reward way to bet on that. Once in a while, it will be options that seem to have mispriced volatility, as in the case of the GRPN trade idea. -Enis