Cycle Trading

[Duma]

When I put the trade together I didn't even look at the spread in strikes of the two different calls. I simply used a 60% delta for each one. With the strikes only $1 apart, the trade is almost a horizonal spread. A true horizonal spread profits from the faster decay of the shorter time frame option.

So you correctly stated how the profit is made, faster decay of TV of short call.

Here is how I calculated the value of the spread with a 5% price drop for IWM

I opened with this position

Nov05 219c -8.35 31 days
Oct15 220c +5.10 10 days
cost -3.25

So I said what happens in 7 days with a -5% drop.
The original Nov call was 3.63 in the money. With a 5% drop (11.13 for IWM), the option would now be 7.50 OTM.
Looking at the original option chains, an option 7.50 OTM with 24day to expiration is worth 2.00.

Using the same logic for the Oct 15 call, an option 8.50 OTM with 3 days left is worth .40

And then finally a new 10 day 60% sold call is worth 5.20.

So putting it all together after 7 days
-3.25 cost of original positions
+2.00 current value of Nov05 call
-0.40 cost to buy back the Oct 15 call
+5.20 credit for selling new 60% call
+3.55 net

I have gone over my logic several times and I have yet to find any thing wrong. IWM is currently down -1.57% today and my positions have a net loss of -$1 for the day. Current value of options is Nov 5.55 and Oct 2.31. So this gives me some confidence in my calculations.

My normal credit vertical spread is to sell a 60% delta call and then buy a call about 5 or 10 points lower. If I had done that I would be in the same position I was with ROKU 2 weeks ago when price dropped big time after putting on the spread. To recover, I sold the long call and sat on pins and needles until the sold call expired. Came out not losing too much, but hated the trip.

Here is my worksheet