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Strategies & Market Trends : Option Spreads, Credit my Debit -- Ignore unavailable to you. Want to Upgrade?

To: Tim O. who wrote (1420)	5/3/2000 5:37:00 AM
From: FRANK J	Read Replies (1) \| Respond to of 2317

if you do not mind my butting in, i have been studying these kind of spreads also. (primarily a np writer). i did: xlnx long 85p/2002, short may 70. the purpose is of course to generate income. my question, is, why did you do it with calls? i do believe this kind of spread has tremendous potential.thanks

To: Tim O. who wrote (1420)	5/5/2000 11:22:00 AM
From: KFE	Read Replies (1) \| Respond to of 2317

Tim, I used to do mostly vertical bull spreads, but because of the volatility, I often saw profits evaporate. My hesistancy in taking profits was because the net gain is only maximized upon expiration, so I usually would ride it to expiration. Also, the net gain comes from the difference in deltas on the long/short sides, so the gain grows slowly. Do you experience the same problem? I'd appreciate your strategy on profit taking on spreads. Before I do a vertical spread (bull or bear) I will always look at the mirror spread in the puts/calls. The vast majority of times you will better off doing a credit spread rather than a debit spread. For a bullish spread that would mean doing a put credit spread. This also has the added advantage of earning interest on the credit received and if your right about the direction of the underlying there will be no transaction costs getting out because the options will expire worthless. You are right that the maximum gain is only realized upon expiration and it is also mostly true that the maximum loss is only realized upon expiration. Since I mostly use credit vertical spreads that are very short term the decision as to when to take profits is a lot easier. If I can buy the short side back for 1/8 on a spread that I did for a $1 credit with more than one week left I will usually do it. If I received a larger credit when entering I would be willing to buy back the short side for a proportionally greater amount.

To: Tim O. who wrote (1420)	5/8/2000 12:35:00 PM
From: KFE	Read Replies (1) \| Respond to of 2317

Tim, I initated a bull calendar spread on SLR today. Long WRLAE (Jan02 25C) and short SLRGI (Jul 45C) for a net debit of 17 1/8 This seems to be an increasingly more popular type of strategy (writing shorter term calls against LEAPS= calendar spread). I like that you shorted a higher priced option because many who advocate this strategy have done same strike long calendar spreads that when the underlying crosses the strike price the trade becomes delta negative and they find themselves in a bearish position and can't deliver the LEAP against the short call assignment as in a normal covered call. Calendar spreads were a large part of my trading when listed options first starting trading because the markets were not very efficient then and options were only available on the assigned expiration cycle. I would short the front month with anywhere from 3-6 weeks before expiration and buy the next cycle month (4 months left). The front month was always comparatively overvalued. It also helped that a big move in the DOW was 10 points. Enough nostalgia... I currently use calendar spreads as mostly volatility plays. Long if I think volatility is going to go up, short if I think the opposite. One play I have done with calendar spreads is a FOMC play. I will do a long calendar spread in an Index option (usually OEX) about 1-2 weeks before the meeting and unload it the day prior to the meeting or before if IV spikes. The nervousness will sometimes cause a spike in the VIX. Didn't do it this month because the VIX is at such a high level right now that I don't like the risk/reward. Regards, Ken