The vol level picks the shape
Quick one on structure selection.
Whether I buy a straight call or a call spread mostly comes down to how expensive the vol is on the day.
When vol's rich.
The outright calls are just expensive. So I'll cheapen the trade up by selling a strike overhead, somewhere I think the stock's going to struggle to get through anyway. Call spread. Cap the upside. Lower the cost.
When vol's cheap.
The outright starts to make more sense, as long as the stock isn't realising much less than what's priced in. You're not overpaying for the move. You keep all the upside if it really goes.
Case in point.
SMH calls don't look bad for year end. Implied vol is cheap across the whole term structure right now, so the straight call get you all the convexity to a proper move without paying a huge premium.
The habit of asking "what does the vol level tell me about which shape to use" is one of the shortcuts I go through in my framework. When vol's rich, don't buy too much VEGA. When it's cheap, own it. The direction of the trade is the same. The structure changes a lot.
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Imran
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