How to hedge Credit Call spread

[moksha99]

Can somebody please comments on this strategy?
See screen shots file attached ( from Options Express)
1 Day left for expiry
3 Legs
Sell 3 x FXA Aug10 / 89 C + Buy 3x FXA Aug10 / 90 C + Buy 1 x FXA Aug10 / 89C

Entered Trade

Cost
Sell -3 FXA AUG10 89 CALL $0.65 ($195.00)
Buy 3 FXA AUG10 90 CALL $0.10 $30.00
Buy 1 FXA AUG10 89 CALL $0.65 $65.00

P/L = AT expiry
Share price below 89.5 = +100
Share price between 89.5 - 90 = -100
Share price above - 90 = pro rata profit to unlimited

 

[rosehound]

got a link for this?

also, DTE =1..... equals you aren't hedging this i'm afraid, size is too small, time is too short, hedges often perform poorly this close to expiry, are they just showing you how to setup a kind of binary structure whilst giving them multiple commissions?

 

[rosehound]

in fact... WTF?!? sell 3 89 calls, then buy one back?? err.. no thanks

 

[moksha99]

Would you mind explaining in simple terms what is wrong in this set up?

 

[Martinghoul]

So, let me get this straight, you're just sellng a 1x1.5 call spread?

 

[rosehound]

The main issue with the trade is selling 3 x 89c then buying one straight back... does that make sense to you?

also, you say 1 day to expiry, which basically makes it very very hard to hedge, but I think that the one day just refers to the payoff profile you have got - i.e. what it looks like at expiration, rather than saying you actually enter the trade one day prior to expiry.

 

[moksha99]

The idea is simply instead of Just doing a Call Credit spread you add a Bought call
So I have compared and calculated the 2 alternatives
1) Only do Call Credit Spread (CCS
2) Credit Spread + Bought Call (HCS)
This is a "hold until expiry play"
Which one offers better risk reward?
See attached spreadsheet

Exampleignore commissions)

Stock NOV, Aug 10 , 1 day to expiry
Credit Spread:
Sell 9 x $38 calls @ 0.79 = + 711
Buy 9 x 39 Calls @0.19 = - 171
total Credit = $540

Bought Call
Buy 3 x $38 Call @0.83 = -249

Lets compare 2 strategy
1) Only do Call Credit Spread (CCS
2) Credit Spread + Bought Call (HCS)
At expiry:
Stock Below $38
CCS = +540 / HCS = +291

Stock In between $38 and $39 ( Say $38.5)
CCS = +90 / HCS = -159

Stock Up $42
CCS = -360 / HCS = +840

 

[Martinghoul]

It's very simple... If you sell a straight call spread, both your upside and downside are capped. Your payoff (at expiry) looks like this:

If you sell a ratio call spread (sometimes they call this strategy "call backspread"), your payoff at expiry has (very) roughly this shape (ignore the strikes etc):

What you prefer depends solely on the relationship between the probabilities you assign to the various outcomes at expiry and the probabilities implied by the option prices in the mkt.

 

[moksha99]

So Martinghoul
What I am proposing looks like your backspread
except one diff the graph from trade calculator shows a small profit for stock below first strike instead of zero
However what it seems I can;t do is
After doing the spread (say Sell 3 x 10 calls and buy 3 x 11 calls)
I cant buy another 1 x 10 call as the OX platform automatically cancels it out of the first 3 x calls soled!
It has to be done in separate account
Still I will appreciate if somebody can pin point if there is a big gap in what I have posted
Thanks
MJ

 

[Martinghoul]

So Martinghoul
What I am proposing looks like your backspread
except one diff the graph from trade calculator shows a small profit for stock below first strike instead of zero
However what it seems I can;t do is
After doing the spread (say Sell 3 x 10 calls and buy 3 x 11 calls)
I cant buy another 1 x 10 call as the OX platform automatically cancels it out of the first 3 x calls soled!
It has to be done in separate account
Still I will appreciate if somebody can pin point if there is a big gap in what I have posted
Thanks
MJ

I really don't understand why you want the extra call to be separate? Options are fungible, so it has to cancel out. What you're doing is selling 2x10 calls and buying 3x11 calls. That's a ratio backspread with the payoff profile at expiry that you can examine easily.

 

[GTS]

verticals are largely binomial, backspreading often removes the credit and then some.