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I have bought spread call on stock X. After that point, the stock went up and came back. My short position is the same price as it was when I bought it 1 month back. At this point If I just clear out my short position and keep my long call then do you see anything wrong with that ?

Basically convert my spread call into just call.

  • I am not sure if I am allowed to use real stock ticker and value on this thread.


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your question is just fine the way it is. No need to use the stock ticker (or option), as you gave all the detail necessary for a good question. Unless absolutely necessary to explain a trade strategy, it is best to do exactly what you did, which keeps the question from being specific to a particular security. – Ellie Kesselman Jul 15 '12 at 15:11
up vote 1 down vote accepted

Just so I'm clear- the end result is a long call, and you think the stock is going up. There is nothing wrong with that fundamentally.

Be aware though: That's a negative theta trade. This means if your stock doesn't increase in price during the remaining time to expiration of your call option, the option will lose some of its value every day. It may still lose some of its value every day, depending on how much the stock price increases. The value of the call option just goes down and down as it approaches maturity, even if the stock price stays about the same. Being long a call (or a put) is a tough way to make money in the options market.

I would suggest using an out-of-the-money butterfly spread. The potential returns are a bit less. However, this is a cheap positive theta trade so you avoid time decay on the value of the option.

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+1 @Brad - where have you been? The board lacks posters who are options-literate. In general, options discussion is a rare niche. Welcome to SE. – JoeTaxpayer Jul 15 '12 at 16:38

Yes. There are levels of option trading permission. For example, I've never set myself up for naked put writing.

But, if you already have the call spread, buying back the shorted call will leave you with a long call. This wouldn't be an issue. As long as you have the cash/margin to buy back that higher strike call.

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yeh I have the permission and cash to buy back. Thanks...I do see upside in the stock from here I think this is safe to do... – Ved Jul 13 '12 at 17:38
There are times that higher strike has come down so much that it makes sense to buy it back and uncap the potential gains. Not an uncommon transaction. Have fun, but know the risks of options. – JoeTaxpayer Jul 13 '12 at 17:45

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