How you should convert a long call to a bull spread
Useful when the underlying is likely to rebound soon after its drop
So far, we have discussed setting up option strategies. We now shift our discussion to managing these strategies. What should you do when your long call position accumulates losses as the underlying moves in the opposite direction? This week, we show how to recover unrealised losses on a long call by converting the position into a bull spread.
Conversion spread
Suppose you buy the 14400 call expecting the underlying to move from 14359 to 14750. Note that you will have to apply the “implied volatility” rule to choose between at-the-money (ATM), immediate in-the-money (ITM) and immediate out-of-the-money (OTM) options. This rule was explained in this column dated December 13, 2020.