This article will look at four different short vertical call spreads on the same underlying in order to distinguish which call spread is most suitable.
In the options class I recently taught at our New York City Center, a ticker was discussed that had extremely high implied volatility (IV) and was in a strong downtrend. Once the chart was looked at it was clear to all of us in the class that Groupon (GRPN) had broken through its demand zone and was in a clear downfall. Instantly, we started to examine possible spread trades.
Online Trading Academy’s Professional Option Trader course teaches that when I.V. is high, in the fourth zone of our volatility thermometer, credit spread trades are considered the correct option strategies to utilize since they will take advantage of IV returning to the norm. In GRPN there was an issue regarding the price of the underlying. In our Pro-Trader class we suggest that students stay away from trading stocks that are less than fifteen dollars and less than one million average daily volume. For GRPN an exception was made, for education purposes only. Currently the general market’s IV is somewhat low which makes it extra hard to find underlying products that are at the other extreme, high.
52 Week Low HV
Current IV
52 Week High HV
Conclusion
41
140
106
Be a seller of options
Figure 1: On the day we looked at GRPN, its IV had just broke the 52 week high historical volatility
Now, let us look at the four different short vertical call spreads that were looked at in class and see what the differences were amongst them.
First Example
The first example involved doing the Aug 6/7 Bear Call Spread:
Option Strategy: Bear Call Spread
Action: GRPN $ 5.80 [Aug expiry is in four days), BTO + 1 Aug (2xOTM) 7 call @ 0.05 (money out), STO -… Continue Reading
