Option strategies come in many flavors:
straddles, strangles, butterflies; you name it!
You’re going to learn the EASIEST, CHEAPEST, LOW
RISK strategy –
the Debit Call Spread, a/k/a Long Call Vertical,
a/k/a Bull Call Spread.
A SPREAD is a position where you SIMULTANEOUSLY buy one Call
(or Put)and sell another Call (or Put).
There are 3 directions of spreads:
Vertical —- Horizontal —– Diagonal
Question #1: The easiest, cheapest, low risk option strategy is:
A.___a vertical straddle.
B.___a vertical Iron Condor
C.___a colorful butterfly strategy
D.___the debit call spread/bull call spread.
Spreads are VERTICAL because the EXPIRATION DATE of the bid(sell)
option and ask(BUY)option prices are the same.
Example of Debit Call Spread a/k/a Bull Call Spread —
Open order for GM:
Bought 1 GM OCTOBER Call 40 @ 3.48
SIMULTANEOUSLY: Sold 1 GM OCTOBER Call 41 @ 2.88
= Premium is 60¢
Question #2: How did you get a premium of 60¢:
A.___by subtracting strike prices
B.___by dividing strike prices
C.___subtracting bid premium from ask premium
D.___subtracting bid premium from strike price.
There 2 VERTICAL spreads that are either Credit or Debit:
CREDIT spread: you RECEIVE a premium
DEBIT spread: you PAY a premium.
Question #3: Vertical spreads are:
A.___credit spreads and you pay a premium
B.___debit spreads and you receive a premium
C.___debit spreads and you pay a premium
D.___headed in a horizontal or diagonal direction.
You will be RECEIVING cash when you
open a Credit Vertical Spread.
BULL PUT SPREAD a/k/a Short Put Vertical
a/k/a Put Credit Spread
Always open this spread Out-of-the-Money!
Example of Bull Put Spread a/k/a Short Put Vertical —
Open order for Starbucks @ $43.00 a share:
Sell (bid) 1 SBUX NOVEMBER Put 42 @ 3.60
SIMULTANEOUSLY Buy/Ask 1 SBUX NOVEMBER Put 40 @ 2.70
Question #4 – How much premium do you pay for this spread:
Calculate MAX PROFIT, SBUX spread:
Net credit is 90¢ premium ($3.60 minus $2.70 = 90¢)
90¢ X 100 = $90.00 is the maximum amount you can make
You keep the $90.00
Calculate MAX LOSS: $110.00 = The difference between the 2 strike prices
($4200 minus $4000 = $200 minus $90 received)
Question #5: What is the maximum loss for the SBUX spread if you
close before expiration:
RISK OF CREDIT SPREADS
1. If you don’t close the spread before the Expiration
Date, you could find yourself owning unwanted shares of stock.
2. You need money in your account (margin account) to cover the
stock that you sold and didn’t own.
SBUX $42 X 100 shares = $4200)
Answers: #1: D — #2: C — #3: C — #4: D — #5: A
The cheapest, lowest risk strategy
You will be PAYING CASH when you open a Debit Call Spread
a/k/a Long Call Vertical (you think the stock will go up).
Always open the debit spread In-The-Money.
Example of Bull Call Spread:
Walgreens stock is $51.00 a share.
Open (Ask): Buy/ask 1 WBA October Call 45 @ 3.00
($3.00 X 100 = $300
SIMULTANEOUSLY: Sell/bid WBA October Call 50 @ 1.00
(Received $1.00 X 100 = $100)
Equals a $2.00 premium X 100 = $200 (amount you pay upfront)
Question #1:What is the amount to pay upfront:
B. __ $3.00
Built-in BIG ADVANTAGE of DEBIT Spreads:
FINANCING” — Bull Call Spread:
1. BUYING (Ask) a call @ $3.00 and
2. “financing” with $1.00 by SELLING (Bid) another call.
3.PLUS, additional “financing” of $2.00 (premium)
of your own money paid upfront.
SUMMARY DEBIT SPREAD:
Cost to Buy(Ask): $3.00 Total
Sell (BID) $1.00
Cash Upfront +$2.00
Calculate MAX PROFIT, WBA debit spread:
The difference in strike prices:
$50 minus $45 = $5.00
minus $2.00 cash paid = $3 X 100 = $300
(the maximum amount you can make)
Calculate MAX LOSS, Walgreens debit spread:
The most you can lose on this debit spread order is the
cash of $200 you paid upfront!
Close orders on BOTH buy and sell together on all spreads!
Question #2: What is the maximum profit you can
make on this Walgreen’s debit spread:
Answers: #1: D — #2: D.
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