Option Traders Unite Group Forum » How Does Delta Affect Vertical Spreads?

How Does Delta Affect Vertical Spreads?

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Posted by Oracleguy on August 20, 2008 (09:27AM)

I think I'm getting a lesson on the Greeks the hard way.  A few weeks ago a purchased a Vertical Call Spread on SOLF (12.50/17.50 Jan 2009).  It was trading around the 12.50 at the time, but I was bullish on its outlook.  I purchased the Jan 09 spread to give myself enough time to be right.  The spread cost me a little under 2.00.  Little did I know that the stock was going to shoot up faster than I thought.  Here I am in Aug and the stock is trading at over 19.00 but I can only get about 2.50 to close the trade (or 5.20 to close the short call).  Unless I am lucky enough to be assigned early, I am going to have to wait until Jan 09 and hope the stock does not tank before then to maximize my return on the spread.

 Is there anything I could have done (or can do now) to realize a reasonable profit earlier?

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Posted by optionsguy on August 29, 2008 (05:25AM)

Hello Oracleguy,

These are the three posts that will answer your questions above about the delta and the pricing of spreads.

long call spreads: part 4 07/24/07 03:00 AM
long call spreads: part 3 07/16/07 03:00 AM
long call spreads: part 2 07/09/07 03:00 AM

One reason why the spread is not paying out a lot is because of the implied volatility in these option contracts. They are trading at an 115% implied volatility. With that amount of IV in the option you sold it will be a while before the spread value truly increases in price. It is nice to have the high IV on the initial sale of the option, but not so nice when trying to close the position. LEAPS spreads are hard to trade on with highly volatile stocks, implied volatility can really mess with them becuse they have sooo much time premium in them. 

The width of the spread 2.20 x 3.30 is because the options don't have a lot of volume. Because of the bid/ask spread is so wide, I would've thought about just buying the stock since it was only a 12 dollars stock to start with.

Regards,
Brian  (Og)

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Posted by YoungCash on September 02, 2008 (02:58AM)

To see it graphically, play with the options calculator.  You'll see the how the values will change over time.  Vertical calls behave much like you are describing, and can be disappointing in a situation such as yours.  It may be interesting to see how European style options (those that can only be executed at epiry) behave in vertical spreads as compared to the American style that we are used to dealing with.

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