Followup on DOTM bull call spread and DITM bull put spread

Thanks so much, Kenneth.  In fact, I don't believe we truly are on opposite sides of the discussion; I believe, rather, that our methodology or understanding or practice may differ.  My position (opinion) remains as it was all along: that OTM bull call strategies are the opposite of ITM bull put strategies, both from the point of view of debit vs. credit, and the deltas being positive vs negative, respectively.  Now, to address some participants' assertion that they are "the same," because they complement each other (call delta 0.01 vs. put delta -0.99=1) is not what my argument is all about.  My position has been all along that in an OTM bull call spread with a tiny delta, the underlying stock would have to make an enormous move to the upside for that delta to respond, and for the spread to increase in price, and therefore be favorable to the buyer; while a similar enormous move to the upside on the ITM put spread would substantially decrease the cost of the put spread in favor of the seller, because of the delta near -1, that implies an almost 1:1 move of the options in relation to a move in the stock.  Both positions are bullish.  The call spread costs very little to enter, true, but would require too high a move to be influenced positively; while the opposite is true for the put. 

Whether my understanding of deltas (and thetas, in this case because of the very short expiry) is supported by the other participants in this debate is irrelevant.  This has been a hypothetical position all along, as I repeat, I would never select a front-month expiry for such positions, and I almost never, ever buy OTM calls.  My own methodology, if I wish to buy calls, especially OTM calls, would be to go very far off into the future to allow them time to fulfill their promise.  I'm generous that way.  As stated previously, my own preference in regards to puts is to do OTM naked puts or bull put spreads, but OTM (at a price less than the current stock price).

My hypothetical positions on AAPL, the subject of this debate, have been placed as a virtual trade on a great new platform that is currently a private beta, going public in the near future (preferred browsers include Chrome/Safari/Firefox).  To see my two spreads dance to the music in real time, please click on http://www.tradeclique.com/trader/yaelt#yael.

Another reminder of my preferences is that I generally do not wait for expiration.  I got burned badly in the 1999-2000 dot.com.  Whether it costs more or less in commissions is irrelevant to my peace of mind.  In the hypothetical ITM bull put spread above, since it was placed with a view that AAPL would make a substantial move to the upside by the Sep. 12 unveiling of a new iPhone, my preference would be to close down my put spread as soon as it presented a "significant" profit. I put that in quotations because I cannot tell you what I would consider significant, as to time to expiry is so short.  However, again, hypothetically, since I received a credit of $1800 for this trade, I might consider buying it back to close at, say, $1200 or so, being quite delighted with a profit of $600 in a few days' time (we placed this hypothetical trade around the beginning of Sep.).

Adjusting the Legs

Yesterday, I set up a Strangle With a Twist on Netflix (NFLX) right before earnings.  NFLX came out with earnings which were very positive, but "guided" lower.  The stock dropped in after-hour trading, and is trading considerably lower this morning, down about $16.75 at this writing.

Recall that I had two spreads on the stock: May 2011 $260-$265 Bull Call Spread and the May 2011 $235-$240 Bull Put Spread.  Both spreads are bullish; both spreads were set to expire May 2011.

With the stock currently down about $16.75, the call options are trading lower (the call options are currently out of the money - OTM), while the put options are trading higher (the put options are currently in the money - ITM), I have executed a few adjustments, as follows:

I bought to close (BTC) the May 2011 $265 call options for $2.90 ($290 per contract).  I sold them yesterday at $9.75 ($975 per contract), so my profit on this leg is $6.85 ($685 per contract).  That leaves a Long Call at the $260 strike expiring May 2011.  This is a Long Call (Long means that I own this position), therefore, there is no Margin Requirement.

I sold to close (STC) the May 2011 $235 put options for $10.35 ($1,035 per contract).  I bought them yesterday at $8.25 (of $825 per contract), so my profit on this leg is $2.10 ($210 per contract).  That leaves a Naked Put at the $240 strike expiring May 2011.  This is a naked position, therefore, there is a Margin Requirement of $5,977. 00.

Why did I adjust these legs?  From past experience, it seems that there is a knee-jerk reaction to negative news, and I am betting that the selling action is overdone, and the stock will recover.  So far, by removing those two legs (the short call* and the long put*), I have put $895 back into my account.  I opened both spreads yesterday at almost no cost to me.  My risk here is that the stock will not recover to the $240 strike naked put, in which case the stock will be put to me, and I will be obligated to buy it at the strike of $240 (refer to the lexicon for definitions).  As expiration approaches, I can reevaluate my position to see if the fundamentals of the stock are still interesting enough to wish to hold the stock, and if not, I can simply buy back to close that naked put, thereby relieving myself of that obligation.  In the event I do wish to allow the stock to be put to me, my break-even cost would be $240 (the strike price) less the profit of $895 I just realized, or $231.05.  Looking out to some long-term call options, selling a covered call would bring down the price even more.

With the stock currently trading at around $236, the $240 strike naked put is trading at around $12, which is $4 in the money (ITM) - $240-$236 - and a full $8 out of the money (OTM), or time value.  With May expiration being just 3 weeks away, the Theta of the option erodes extremely fast.  The Theta refers to how much value an option price will lose with every day that passes.  The closer to expiration, the faster an option loses value.

On May 11, 2011, the market started to jiggle (to the downside) a bit more than I like.  NFLX was trading up to $241, but then regressed down to $238, so I decided to roll out my naked puts to June 2011.  By rolling out, I closed (BTC) my May 2011 open position $240 Naked Put at $6.31 and opened (STO) a new June 2011 $240 Naked Put for $12.61, thus pocketing a profit on the May position of $3.74 ($374), and taking in a premium of $12.61 per contract ($1261) for the new June 2011 naked put.