Long-Dated Calls Still Work in This Market

Recently in MTM’s daily group coaching class, we talked about how bullish and resilient the market has been. Sure, it has pulled back at times, but eventually it has rallied and moved higher again. At the time of this writing, that is exactly what was happening. In class, we decided to consider buying a long call to capture the expected continued move higher.

Further Out to Expiration

Rather than a swing trade, which usually lasts less than a week, our plan was to hold on to the position. We decided to buy the October monthly expiration, which at the time had over 130 days till expiration. Our thought process was to hold the position for several weeks or longer but not necessarily come anywhere close to the expiration date. Therefore, we were not as concerned about being in-the-money (ITM). We chose the 565 strike with the SPY (S&P 500 ETF) trading just over $530. Looking at the option chain below, we could have bought 4 times the amount (4 X 4.90) at the 565 strike versus the at-the-money (ATM) strike of 530 (21.25). I like to call that more bang for your buck despite the bigger negative theta position.

A Move Higher and the Greeks Change

The screenshot below was taken later in the session that same day. The ETF moved about $3 higher, which is a very good thing for a positive delta position. Were we ready to take profits just yet (5.70 – 4.90 or $80 in real terms)? Of course, but we also wanted to give the ETF some time to possibly move even higher. But notice how the greeks changed. Delta became bigger because of the positive gamma position and IV ticked up a tad, which is a good thing since we had a positive vega position too.

On Cue Rally

As we expected based on what we saw on the chart (pullback and potential support), shares of NVDA rallied over the next two days as seen below. I always ask traders to look at a chart and determine what has a better chance of happening? In this case, there was a much better chance the stock would rally, even if only temporarily, and it did.

The positive delta and positive theta dropped the spread’s premium as seen below. The spread could now be bought back for 0.07 (0.22 – 0.15) or $7 in real terms. That would leave the option trader with a profit of 0.50 (0.57 – 0.50) or $50 in real terms. Not too bad!

Take Risk Off the Table

At the very least, one should consider moving up the hard or mental stop loss to try to reduce risk. That is a central goal of any trader: to remove risk. With a move in a desired direction already taking place the same day, it seemed like a good time to do it.

Final Thoughts

Many option traders have moved on from “just” buying a long call. But sometimes that is the best position for an expected long move higher. You cannot have a better risk/reward trade as an option trader.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

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