satorino-You make a great point about implied volatility. Volatility is now very low so that does make the actual cost of an option cheaper. However in doing a vertical spread it is only the difference in two options that matter, so the absolute value doesn't matter. Or to put it another way, does the implied volatility effect the time value of an option, because that is what is making the money when doing spreads. I do not know the answer. Comments anyone? If it does affect the time value than all I can say is that my strategy of doing spreads is going to get better as volatility goes up.
However the strategy of selling covered calls with this low volatility is not working at all. The small amount being offered is not worth it. However on the other side, using options to create synthetic longs is a great strategy because options are so cheap. This morning I opened a long Citi Jun 4 call and sold a Jun 3 put for .08 debit. So for just $8, I could easily make $100+, or I could own Citi for $3, or I could lose $8. I'm happy with all. Just playing around.
Let me explain the day trader thing with a real life example. On 1/5 JPM was trading in the mid 43's and I was expecting the stock to continue going up. I did a vertical DEBIT spread as follows:
sold 2 Jan 41 calls for 2.55
bought 2 Jan 38 calls for 5.32 for a net debit of $554.
The stock closed on expiration 1/15 at 43.68, so both of my options were in the money. On Monday morning, both of the options were gone and there was a trade in my account for Fri of buying 200 shares at 38 and sell 200 shares for 41 for a net gain of $600. Thus a day trade had been done. Debit spreads always generate an actual stock trade at expiration if the stock price has not moved the wrong way.
Good questions and comments.
Jon
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