Thought Blog

I have found a new strategy for playing the "bull call vertical spread" in stock options.

Here's what you do, around 2 to 3 weeks before the expiration date of the month, sell the at-the-money call, and buy an in-the-money call by 2-3 strike prices.

The benefit of doing this is that since the extrinsic value is the highest for the at-the-money call option, we sell that options since we know the extrinsinc value is going to be wiped out at expiration. To hedge it, we buy a lower-priced call option, which does not have much extrinsic value, hence time does not work against us in this leg. So overall, time works in our favor. Hence, the breakeven of this trade is below the current stock price. So if either the price stays at its value or increases in the next 2-3 weeks, you make money. If it goes significantly below then you loose money, but the money is not that much since you did a spread and hence your investment was low.

Apart from this strategy, I usually do call spreads for a longer term like 6 months.... theres another neat trick I do -- if the stock price moves against you significantly, then you buy back the short leg of the position which will be very profitable. Hence when the price moves back up, you can make more profit on long leg of the position!