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ABC stock goes up 1.00, your bull call spread would be at 1.30 now because the +30 delta. Mind you the greeks change in value depending on how close to the money they are. Once they get In-The-Money (ITM) your delta changes even faster, but that all depends on the Gamma, which is the rate of change of the Delta.
That is why and where people get confused.
There are just too many variables that need to be factored in.
Not to mention the underlying market conidtions will be a major factor to your spread. |
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Here's a very simple way to determine whether an option is too pricey, meaning there is too much volatility built in to the price. Figure out what the intrinsic value of the option would be if the price of the underlying stock were to move by 10%. Compare that to the current price of the option. If it's not at least 50% higher, the option is too pricey.
Let me break that down a bit.
XYZ stock is trading at 51. The 50 Call is currently at 3.50. A 10% increase in the price of XYZ would put the stock at a bit over 56. The intrinsic value of the option - which is stock price minus strike price - would be 6. That would represent an increase in the 50 Calls by 2.50, which is more than 50%. By my personal trading rule, that makes it worth buying. If the option were at something like 5, though, it would be too expensive.
To provide parameters for my option trading I don't hold options into their final month and I always trade at-the-money strikes.
Naturally, the 50% measure is just a guide. And yes, I realize that the option would actually be worth considerably more than the intrinsic value if the market were to rise 10%. I just use this rule of thumb as a very conservative method of identify option trades with real potential.