This stems from the market reality that in the money options do not always move as fast as just/slightly out of the money options. When an option goes in the money, while intrinsic value does increase, time value often decays away. So basically the short call (135 strike prices) becomes a better relative performer than does the long option (125 strike price). Generally speaking it is better to swap out deep in the money options for at or just out of the money options, as these will perform at least just as well if the market continues to move and should have lower risk if the market should turn and start going the other way.
Trades of this sort are best used, in my opinion when we think a move is just about to begin or is in its infancy. They provide a lower risk alternative and also can allow for a longer time frame for market participation, which helps to cut down market timing risk some.
The coffee market right now looks like a market where this sort of strategy in my opinion does make some sense for this type of trade. Coffee is market that in the past has been capable of being a “big” market, in the 1990’s the market has moved more than 50 full points in a single month, and at $375 a point, that is a very big move indeed.
Coffee was in a steady downtrend since December of 2006, and put in what looks like substantial lows in May, and has been making a reasonable recovery since May 1st.
Harvest concerns in Brazil and Kenya have been noted in the news recently. South America is also entering its winter season and frost can spell trouble for crops going forward.
Coffee is a favorite of commodity trading funds and should they start feeling friendly towards the java juice this could be yet another factor.
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