Do I trade a call or a call spread?

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The age-old question of when to trade a call or a call spread probably came about right after Sage invented the reversal.  The question of when to trade a call or call spread is really about expectations.  One of my favorite self-invented maxims is “Make the trade fit the outlook.”  Since both have a long delta flavor let’s pull them apart and dissect the two basic option trades.

Call spreads cost less money but do they make enough money?

I use call spreads when I want to save money.  The reality is call spread performance is not that great even thought the basic options charts says you get all the money at expiration.  And that is true.  However as time progresses the risk in the call spread starts to increase since there are more and  more dollars in the trade versus what the trade can make.  Keeping a long $5 call spread on to catch the last .50 might take a week from expiration and still need the pin.  Remember a call spread is the short put spread and those ATM put spreads will hold value until the very last moment.

VIX Apr options are starting to look interesting

Calls are for a go-go long position

Long calls are for a rip up in the stock or index over a period.  Sort term, mid-term whatever term calls are the choice for massive upside.  Riding a long call is important too.  Using a stop routine or hedging with a put helps because the whole idea is to stay in for the rip.  Having a call go to zero on an unexpected overnight drop is not Bueno.  Usually I try to manage some of the long premium risk.

Time to expiration helps

Shorter term trades calls are better than call spreads.  If something pops the call spread can get underwhelming performance and time running out is a factor short term.  Long term trades can work well with call spreads since the strikes are set nice and wide with the trade much less exposed to a move in volatility.  With a long term spread there is the option of closing the short call on a move back.

A VIX call trade

VIX call spreads make nice long vol trades since they decay slowly.  VIX calls make good blowup hedges against more aggressive SPX iron condors.

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Disclosure – VIX, SPX positions

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