Short Book on Options
I am having trouble understanding spreads as you describe on pages 81 - 83,  Rolling For Opportunity.  You talk write about "selling a time spread," and "Buy back the all and sell a new call in a spread transaction."  I thought a spreads involved taking positions on two options at the same time.  Could you please elaborate.  I am involved in this with my United Airline stock I own on the May 35's.  (As a retiree we all got a distribution from the bankruptcy settlement and I use it for covered calls now.) 

Hello Stefan,

  1. A spread is a transaction that involves (at least) two different options.
  2. A spread usually involves buying one option and selling another, but it may involve buying (or selling) both a put and a call.  The spread under discussion in the book involves buying one call option and selling another call option.
  3. If you have no position and enter an order for a spread, when the order is filled, you be taking (as you would expect) a position on 2 options at the same time (each is called a 'leg').  For example, spread order:  Buy the IBM Oct 95/100 call spread.  That means buy the Oct 95 call and sell the Oct 100 call.
  4. If you already have a position, you may enter a spread order that involves 'closing' an existing position and opening another.  Example:  Let's say you currently own 500 shares of UAUA and you previously sold 5 UALEG (May 35 calls).
    1. A time spread, or calendar spread, involves two options of the same underlying stock.  The strike prices are identical. Only the expiration month varies. 
    2. If you buy the option with the longer expiration, you are said to be 'buying the time spread.'  If you sell the option with the longer time to expiration, you are 'selling the time spread.' 
    3. If you roll the position (sometimes it will be for opportunity, sometimes it will be because you don't like any alternatives) by entering a spread order to 'buy 5 UAL May 35 calls and sell 5 UAL Jun 35 calls' you are selling the time spread. 
    4. Note:  this is a true spread transaction, as it involves two different options.  But, when the trade is executed, your new position is: long 500 shares and short 5 Jun 35 calls.  You executed a spread, but your new position involves only one option.  That's because part of your spread involved 'buying May 35 calls to close' and the other part involved 'selling the Jun 35 calls to open.'  With this trade, the May 35 calls disappear from your portfolio and the Jun 35 calls take their place.
    5. Note:  In the event that you are assigned an exercise notice before you have a chance to repurchase those May 35 calls (this is a possible, but unlikely scenario), it's too late to roll the position.  In fact you would have no position remaining.  You could start a new position by buying stock and writing (selling) Jun 35 calls, but you would no longer be able to roll the original position.
    6. One usually waits until very near expiration before rolling.  But, if the price available for the 'UAL Jun/May 35 call spread'  is attractive to you, then you can certainly sell that spread to roll the position early.  To me, that means 'rolling for opportunity'
Stefan Steinberg