TRADING BEAR CALL CREDIT SPREAD

 

投资角  INVESTMENT CORNER

 

責任搜集& 編輯潘家墉先生

DENNIS PHAN Tiên Sinh Phụ Trách

Email:  general@khaiminh.org

 

 

 

 

 

 

 

 

Today, we touch base with a bearish strategy utilizing call options with a credit posted to our account when we enter the trade.  This strategy is also known as selling vertical calls.

 

By the end of Thursday, September 23, 2010, IBM stock closed at $131.61/share, down $0.90/share from the previous trading day. Let say we are bearish about the stock and we chose to sell vertical calls on this stock. The option chart of IBM stock for the month of November 2010 should look like the following table:

 

November

2010

Option

Chain

for

IBM

stock

 

 

 

IBM

131.61

-0.90

 

Calls

 

 

 

 

 

 

Strike

Symbol

Last

Bid

Ask

Volume

Open Interest

125

IBM112010C125

8.25

8.20

8.55

93

548

130

IBM112010C130

4.90

4.90

5.00

424

792

135

IBM112010C135

2.36

2.36

2.42

498

1970

140

IBM112010C140

0.91

0.91

0.97

994

3514

 

 

For simplicity purpose, we will use last option prices to determine net credit.

Let’s look at 3 scenarios here:

 

1.     Sell 135/140 calls: We sell 135 call and buy 140 call for a net credit of $1.45/share.

2.     Sell 130/135 calls: We sell 130 call and buy 135 call for a net credit of $2.54/share.

3.     Sell 125/130 calls: We sell 125 call and buy 130 call for a net credit of $3.35/share.

 

To make money in this strategy, the stock has to close below the lower strike price and both options expire worthless. Our max gain is net credit and max loss is the difference between strike prices gap and net credit.

 

In scenario 1, we sell OTM option. This is a conservative move. The stock needs to close below 135 for us to be profitable. Notice IBM stock already traded below 135 when we enter the trade.

In scenario 2, we sell ATM option. The stock has to move below 130 for us to be profitable.

In scenario 3, we sell ITM option. This is an aggressive move. The stock has to close below 125 for us to be profitable.

 

Please notice we trade higher winning probability for a lesser profit.

 

 

 

Dennis Phan  潘家墉

24 October 2010

 

 

 

 

 

 

 

 

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