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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe) -- Ignore unavailable to you. Want to Upgrade?

To: the options strategist who wrote (1503)	7/8/1999 12:33:00 PM
From: RoseCampion	Read Replies (1) \| Respond to of 2241

Anyone: Is there a disadvantage to opening a debit call spread 5-7 days prior to expiry as opposed to opening it 5-6 weeks prior to? If there is, what is it. When you open a vertical debit spread (aka bull spread, assuming it's done in calls, not puts), you are hoping the underlying equity rises in price, which also will cause the distance between the prices of the two options to widen. Your profit is the difference between the difference between the two options when you bought (the original debit) and the difference between them when you sell (the closing credit). This difference can never be larger than the difference between the strike prices of the option you bought and the option you sold. (Yea, I know you knew all this.) The only problem I can see with opening a debit spread in the final days of an option's life is that there's not much time for the spread difference to widen, since (except on very volatile stocks) there's precious little time value left in the calls - you're dealing mostly with intrinsic value at that point. In most cases, I think you'd be better off simply buying (for example) an 80 call rather than establishing a spread in, say, 70 and 90 calls. The profit-and-loss charts don't look that much different - the spread does have a better return if the stock advances slightly before expiration, but much lower return if it advances greatly before then. To my mind, if you're going to speculate with options a few days before expiration, go for the gusto and try to hit a home run. Save the spread for longer-term plays, IMHO. Also don't neglect that the spread has at least 2x (and probably 3-4x) the commission costs of the outright call purchase, which can significantly affect your total return. PS: Would love to hear dissenting opinions on the above - where my money is concerned, I can't get enough in the way of good educatin'. -Rose-