From tradeking: Tip
The maximum value of a long call spread is usually achieved when it's close to expiration. If you choose to close your position prior to expiration, you'll want as little time value as possible remaining on the call you sold. You may wish to consider buying a shorter-term long call spread, e.g. 30-45 days from expiration.
But I would like to use in different way
I would like to long the market but also I would like to take the advantage of volatility.
Initially I bought LVS JAN 2010, 20 CALL for 2.35
At that time I wasn't thinking to use vertical spread. I was bullish on LVS and so I bought it. But in the last 4 days, things are not so good. We got some bad news on LVS. Somebody released report that LVS is one of the top 20 companies that could go bankrupt in the coming 12 months. So the call price went from 2.35 to 1.30 at one time before it recovered on friday to 1.65.
If I had used vertical spread - buy 20 call/sell 25 call - when market goes down you could go ahead buy the sold call. and sell it again when up. (similar to covered call)
These are the instances where you see COVERED call strategy makes excellent sense. But the problem is you can't leverage. I would like to use VERTICAL SPREAD as a substitute to the covered call.
Take another example: Say I'm bullish on LVS in coming 3 months, my target upside is $3
LAS VEGAS SANDS CORP ( LVS ) Last 16.13 Change 0.68 Bid 16.20 Ask 16.25 Volume 62,770,024
| Leg 1 | Leg 2 | Price | Duration |
|---|---|---|---|
 Swap Symbols Symbol Format: (IBM AB) | Symbol Format: (IBM AB) |
LJJ AY LVS Jan10 $17.5 CALL | LJJ AX LVS Jan10 $22.5 CALL | — — | — — | — — | |
| Bid | 2.35 | 1.05 | — | — | — |
| Ask | 2.45 | 1.20 | — | — | — |
| Last | 2.35 | 1.10 | — | — | — |
| Change | 0.30 [14.63%] | 0.25 [29.41%] | — | — | — |
| Volume | 10,656 | 54 | — | — | — |
| Delta | 0.66 | 0.57 | — | — | — |
| Open Int | 12,451 | 4,502 | — | — | — |
| Desc | — | — | — | — | — |
Here is how it could play out:
BUY - LVS JAN 2010, $17.50 CALL (Strike price A)
SELL - LVS JAN 2010, $22.50 CALL ( (Strike price B)
I'm paying $1.27 to enter the above combined trade( commission not included - In this case commission will be charged as 2 orders with 1 contract each = 2*(4.95+0.65/contract) = $11.20)
At the expiration that is as close of Jan 22, 2010: consider the following possibilities per contract. Based on LVS trading on expiration day
Notation:
A = STRIKE PRICE A
B = STRIKE PRICE B
BEP = BREAK EVEN POINT
- BREAK EVEN: LVS = A + Net debit paid = 17.50+1.27 = $18.77 = BEP
- Note: We will be break even if LVS trading at 18.77
- WORST CASE: LVS<=Strike price A
- loss = net debit paid = 1.27
- Note: Without using spread you would have lost $2.35
- LESS LOSS: LVS >A and LVS <18.77 (BEP) = (for example say trading at 18)
- loss = stock price - A - net debit paid = 18 - 17.50 - 1.27 = 0.77
- PROFIT - to have any profit LVS should be trading >BEP
- Say if LVS trading at 20
- profit = 20 - 17.50-1.27 = 1.23
- MAX PROFIT: LVS >= B which is LVS>22.50
- profit = 22.50-17.50-1.27=3.73
Note: Don't forget commissions. Unless calls are expired worth less, you are going pay. Some brokers charge more when a call exercised (more than closing a call).
Happy options trading:
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