Adjusting The Bull Call Spread

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Rudolph Preston
6 years ago
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1 Module 6.1 This class is a production of Safe Option Strategies and the content is protected by copyright. Any reproduction or redistribution of this or any Safe Option Strategies presentation is strictly prohibited by law. The information presented in this class is for education purposes only. Safe Option Strategies does not make any recommendation to buy or sell stocks or options. Trading stocks and options comes with risk and you are solely responsible for any losses you may incur as a result of trading.

2 The Bull Call Defined Debit Spread Buy to Open the Trade Long Call is Placed At or Just Out of the Money and Typically Days to Expiration. This is our Primary or Money Making Option. Short Call is Placed One or Two Strike Prices Higher and in the Same Month of Expiration. This is our Secondary or Hedging Option. Cost Basis or Net Debit of the Trade is the Debit of the Long Call Minus the Credit of the Short Call Max Risk = Cost Basis Max Reward = The Difference Between the Strike Prices Minus the Cost Basis Good Target ROI is 15-30% Good Target Time in the Trade is Under 6 weeks (2-3 weeks is preferable).

5 $28.50 SC LC

6 SC LC

7 Adjustment to Calendar Spread SC SC LC

SC LC The stock price does not move up fast enough to create the scenario we want. If we leave the trade as is, we lose money. If we exit the trade early, we lose money.

8 SC LC The stock price does not move up fast enough to create the scenario we want. If we leave the trade as is, we lose money. If we exit the trade early, we lose money. The Bull Call Spread needs to consider the Delta of the two options. The long call delta would ideally be.20 greater than the short call delta. The bigger the difference the better.

9 Calculating Risk to Reward Ratio Module Max Risk = The net debit of both options (the debit of the long call minus the credit of the short call). This is also our cost basis. 2. Max Reward = The difference between the strike prices of the two options minus the cost basis. 3. Max ROI = The max reward divided by the max risk. This needs to be 75% or higher for this trade.

10 BTO $29.00 Strike Call for $1.34 debit. STO $31.00 Strike Call for $0.70 credit. Net Debit $0.64 per share.(cost Basis) Max Risk = Net Debit Max Reward is the difference between the strike prices minus the net debit ($ $0.64) = $1.36 Max ROI is 212% (excellent)

11 Calculating Profit / Loss This is our theoretical break even point. If the stock is trading at $29.61 at expiration we break even. Higher and we make money; lower and we lose money.

00 strike call is 0.29 (this means for every $1.00 the stock price moves up in value this option will move up $0.

12 The delta for the December $29.00 strike call is 0.46 (this means for every $1.00 the stock price moves up in value this option will move up $0.46) The delta for the December $31.00 strike call is 0.29 (this means for every $1.00 the stock price moves up in value this option will move up $0.29) The difference in the deltas is 0.17 per share so for every $1.00 the stock price moves up the profit in the trade should increase approximately $0.17 per share.

13 Defining our Exit Strategy 1. Because of the deltas and the fact that the short call will raise in value with the long call a reasonable expectation for ROI is 15-30%. 2. Being in the trade for two to three weeks or less helps lessen the effect of time decay on the options. Remember Time works against us on debit spreads. 3. The Adjustment or Secondary Exit will be covered in Module 6.1

14 Summary 1. When a stock has an expectation for a bullish move the bull call spread can be used to take advantage of the move with less risk than simply buying long calls or buying the stock. 2. The bull call spread works best when there is not a significant event (like earnings) that takes place between the time the trade is open and the expiration date of the options. 3. A good target ROI is 15-30% and a good expectation of time spent in the trade is 2-3 weeks. Both of these are due to the time decay of the options.

Winged and Ratio Spreads

Winged and Ratio Spreads This class is a production of Safe Option Strategies and the content is protected by copyright. Any reproduction or redistribution of this or any Safe Option Strategies presentation is strictly prohibited