WAYS THAT CALL SPREADS WIN; +35.7% returns in seven business days
Hey Folks, I want to share how buying a call spread trumps buying the "naked" call. First lets review how the mechanics of buying a call works:
If I'm bullish a stock or ETF and want to pay a smaller amount than the underlying price then I would buy a call option, which is me saying company XYZ's stock price will be more than a specified price by a specified time.
The elements of buying a call are:
1) bullish in posture (I speculate the she's going up!)
2) I define my risk upfront and this amount debited is the most I can lose
3) my profit potential is unlimited
4) I lose all my money if the stock doesn't hit that specified price (strike price) by that specified time (expiration)
5) 1 in 3 ways of winning; the stock must go up and go up sooner than later!!!!
6) Every day the stock hasn't hit my strike price I realize time decay (a negative value) to the position
You go with buying a naked call strategy when you are really bullish a name
Elements of buying a call spread:
1) bullish in posture
2) I define my risk upfront
3) my profit potential is capped
4) 2 in 3 ways of winning; the stock can trade sideways or go up and can make money!!!!
5) there is no time decay so if it takes longer for my stock to go up then my profits aren't eroded
Ex. of the two legs of a spread being profitable; MU has a gain in the long call and the short call
< Long call leg: bought 22 Sep 27 call
< Short call leg: sold 22 Sep 30 call
Always track P/L Open for your net gains
So this image is a few days after the one above and the value of the long call increased because Micron is higher in stock price compared to days prior
< What seems like a lose is ideal as you want this leg to expire “in the money”; it means your long call is winning big!!!
Your concern is how the overall spread is doing. Depending on where the stock price is you could be up in both calls are up in just one at a time. There is that third possibility that our short call could be a big win where the MU price falls below the strike price of our long call ($27) yet the losses suffered in the long call in this scenario would outweigh the gains made in the short call position.
By the way, we took profits in this live money trade based on the bottom image. We bought +2 contracts of the MU 22 SEP 27/30 vertical call spread for $1.54 on 08 AUG and sold the spread for $2.09 on 16 AUG. So that's a profit of $.55 multiplied by 100 (there are 100 shares to an options contract) times two contracts= +$110.
Risked : $316 Profit: $110 = +35.7% return in seven business days (we still had a month to go but why be greedy?)
