Posted on February 26th, 2010 admin No Comments
### Delta

When identifying trades it is essential to look at the delta of the option legs. In particular it is important to calculate the net delta of the bull call spread. The net delta is calculated by the delta of the bought option minus the delta of the sold option. The net delta of a bull call spread will always be positive. The net delta indicates if the share price increases quickly what the value of the bull call spread will be worth. For example, if a bull call spread had a net delta of 0.35, and the share price increased by $1.00, the bull call spread would have increased approximately by 35 cents.

### Vega

The volatility affect on a bull call spread is varied. When looking to enter a bull call spread you look to buy an at-the-money call option. The idea is to buy a call which has a relatively low volatility and therefore trading at its theoretical value. The sold call which you are selling out-of-the-money you are looking for as much volatility as possible. So you are selecting an option that is trading a lot higher than theoretical value. This means you receive greater premium for that option and it makes the bull call spread cheaper to enter. A bought call is best purchased when volatility is low but when volatility is high and the call is too expensive a bull call spread is an alternative strategy. This is because the higher volatility on the bought option is offset by the high volatility on the sold option.

### Theta

The effect of time decay on this strategy varies with the underlying stock’s price level in relation to the strike prices of the long and short options. If the stock price is midway between the strike prices, the effect can be minimal. If the stock price is closer to the lower strike price of the bought call, losses generally increase at a faster rate as time passes. Alternatively, if the underlying stock price is closer to the higher strike price of the sold call, profits generally increase at a faster rate as time passes.

To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

ASX Option, ASX Option Recommendation, Bear Call Spread, Bear Put Spread, Bought Call, Bought Option, Bull Call Spread, Bull Put Spread, Call Option, Delta, Delta Option, Delta Options, Identifying Trades, Option, Option Spreads, options, Sold Call, Sold Option, The Greeks, Theta, Theta Option, Time Decay, Vega, Vega Options, Volatility |