The following questions about my option strategies came up in the forum, but I am republishing them here because they may be of interest to a wider audience:
What is the advantage of going long one call, and then locking in a given spread via shorting another call, versus “locking-in” the spread by going long on puts instead?
My answer below is more generalized, but to address your specific point, we should prefer to “lock in” a profit by shorting a wasting asset rather than buying one ourselves. For most option traders most of the time, shorting calls is MUCH more profitable than buying puts. Indeed, in the several decades I have been trading options, I cannot recall a instance when put buyers were happy for more than three consecutive days. Even those who owned puts ahead of the 1987 crash had just two days of sheer bliss to get rid of them.
Is it that in the latter scenario, one is long twice, and can thus get screwed twice by the pros? I always thought the latter scenario would be a good one in cases of low implied volatility, where the loss on one is mitigated, and the gain in the other is increased when implied volatility rises during larger underlying moves. (That may just be retail-customer theory, which the pros have long beaten. But what do I know? I’m still waiting for someone to start offering straight options on the VIX. Thanks!
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The spreads I prefer are intended to provide a highly leveraged shot at big profits, but without the usual, horrendous time decay. This tactic is especially useful if we expect a stock to rise (or fall) over a period of several months. We also seek to take advantage of fleeting spikes that goose option volatilities to the moon. If, for instance, SLW opens on a gap this morning (it did), we may have a chance to short Dec 15 calls when they are hugely overvalued — sell them, perhaps, for even more than the 0.45 we’d intended. (They topped at 0.50 before receding with the tide.). And, of course, we do so with the expectation that Silver Wheaton will be strong in the coming months, but not so strong that the December 15 calls will go in-the-money. We may ultimately decide to exercise our December 12.50s, a step in building a long-term position. RA
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