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Just a couple of comments before we close the topic...
a/ the way you look at it (time prem sold v/s bot) - it becomes a volatility
+ directional trade which hopes that the short ATM loses more value than the
long OTM - the only way this happens is either/or price goes down or
volatility comes in with no change in price; if price goes down but
volatility does not come in, the trade loses money or treads water.
Just to clarify...all along, we've been tallking about short call spreads as
a directional trade (an alternative to consider from among many, GIVEN a
preconceived bearish directional bias). Maybe I should have given examples
of short call spreads on bearish chart patterns - fact is, I had no idea
(still don't) re what the prices would do specifically for INTC, CSCO, OEX,
Citi.
On any short spread, you will typically sell less premium than you buy if
you want the risk/reward in your favor.
All cases where you sell more premium than you buy will skew the risk to be
greater than or equal to reward.
Risk = max amount lost
Reward = max amout gained.
b/ Some clarifications:
Re INTC/CSCO:
>In both cases above, everyday that goes by, all things being equal, the
>spread reaches closer to parity (-10)
My assumption when taking these fictitious trades is that I want the stocks
to fall - and for some reason I expect it to close Sep expiration closer to
the lower strikes than the upper strikes.
>In addition, you will have to close each of those positions or take some
>other corrective action prior to the end of Sep.
Why? If the short call is not exercised, I stay in the trade all the
time.... The only case where I want to adjust is IF THE FUNDAMENTAL REASON
FOR BEING BEARISH is violated. So I close out the trade and release the
margin money to be used elsewhere. Else, my max loss is already predefined
so why add commission costs....
>IMO, there appears to be a good likelihood that the trades above will incur
>a loss at expiration.
Yes they will, if the underlying "null hypothesis" is proven wrong - ie the
bearish case turns out to be false. The r/r wouldn't change. If you go back
a few emails, the statement I'd made was something like "given a bearish
bias, which instrument would I choose to use from among many?" - and short
call spreads was one of 2 or 3 alternatives discussed. Just to keep things
in perspective - these examples of 9:1 r/r short call spreads were NOT a
clarion call for being short the securities mentioned.
Just to clarify once again - I have no idea where the specific examples are
headed directionally. I just gave them to show you that 9:1 risk reward
opportunities are available in the real world - should the directional
assumptions turn out to be correct and someone wants to dig deeper than a
statement made on some list.
Finally - for the readers - the foll statements need to be corrected for
math in the OEX Aug / Sep analysis from Marshall - I know Marshall got it
right but those not initiated and following nonetheless may get confused:
OEX Correction for Aug:
OEX: Index @ 815
Aug 800c 15.25
Aug 810c 6.125
Short spread 9.125
ML: The OEX on EOD for 8/17 and 8/18 was approx. 815.0 and 813.6
respectively.
In either case, the spread lost money (7/8)
GB: If OEX expired 1.4 points below 815 (Friday's close = expiration) then
the short spread went out at (10) - (1.4) = 8.6.
We sold short it for 9.125 and bought it for 8.6 so we made money. $52.50
per contract, less commissions & OCC fees.
OEX correction for Sep:
OEX: Index @ 815
Sep 805c 24,00
Sep 815c 17.75
Short spread 6.25
ML: The max profit is $ 3.75 if OEX falls to 805 or lower from 815 at
expiration
ML: The max loss is $ 6.25 if OEX stays above 815 at expiration.
GB:The above max profit/loss statements need to be inverted. We make $6.25
at/below 805 and lose $3.75 at/above 815.
Regards
Gitanshu
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