Time to fit all the puzzle-pieces together in this series on long spreads. As you may recall, first we defined long call spreads, talked about time's effects on the position, explored delta and volatility. Most recently we compared long call spreads to synthetic collars and long PUT spreads, for a nice compare-and-contrast effect. Long spreads: the key takeaways
1. Long spreads can be useful with buying options outright seems "expensive". What's "expensive", exactly? Options might fall into this category around certain news events, or for particularly popular stocks like Google. Whatever the reason, a long spread means you're partially underwriting the cost of the long leg by selling the other leg and collecting premium on that sale. Sometimes it's a much more affordable route than just buying the option outright.
2. Know how much net time premium you're buying or selling. It'll give you a much better feel for timing your trade to work with your expectations and expiration.
3. Long spreads offer a delta tradeoff versus buying options outright. It's often cheaper to buy a spread than to buy an option outright expressing your market view. But remember: in buying a spread you're usually getting a lower delta than the comparable option alone, with a correspondingly lower profit potential. Only you can decide if the tradeoff works for you.
4. Spreads mainly max out near expiration. The most active period is usually 30 to 45 before expiration, so keep this in mind as you formulate your strategy and timing.
5. Why "leg in" when you can enter a spread as one trade? TradeKing's spread trading screen lets you enter both legs simultaneously, so you're more assured of creating the net debit or credit you want.
...and that's it from me, folks. If you've got an idea for a new educational series, I'd love to hear it. Comment away, and I'll put it on my list of topics for future posts.
Regards,
Brian (OG)
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.
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