Position
Buy a Call Option, Sell a Higher Strike Call Option
Margin Requirement
No, pay the difference in premiums
Advantages
- Establishes a Range of Protection from higher prices
- Cost is reduced by selling higher strike call
- Lower futures price may improve your buying price
- Flexible, offset at any time, receive remaining value
Disadvantages
- Premium paid in full at time of purchase
- Protection limited to the higher call strike less the cost
- Offsetting before expiration will change the cost & P/L (advantage in
lower market, disadvantage in higher market)
When to Apply
- If market outlook is bearish
- If unlimited protection to higher prices is not necessary or if upside risk
can be better defined or measured - If flexibility is needed to participate in all lower prices
- If capital constraints require maximum pre-defined margin exposure
- As an adjustment to a long future, long call or long collar position after
an increase in price - If in a neutral implied volatility environment
Potential Adjustment
- In a rising market, roll-up short call to a higher strike price to extend
range of protection, roll up long call option to capture gain from increase
in price, and/or sell put option to create credit or help offset cost - In a falling market, buy back short call option, roll down long call option
to capture opportunity from decline in price and/or sell put option to
create credit or help offset cost