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Spreads
Spreads: Spreads are what I consider the most advanced type of trades. They are a way to be covered, but not with stock. To explain this we must use an example. I would buy an option say the 20 Puts then sell the 22 ½ Puts, the actual stock might be at 25 dollars. Now I would do this in ten contracts of each. When the stock is 25 the 20 Put is about 3/16 with 10 days to expiration and the 22 ½ is about ¾. This depends totally on the stock, and can fluctuate dramatically. But as you can see I have a net credit of 9/16. Times this by ten contracts or 1000 = about 580 cash. If the stock stays above 22 ½ we keep all of it. This is done on stock that we think is going up. If the stock falls to 18 they put the stock to you at 22 ½ you put it to someone at 20 thus your risk is the difference or 2500.00 minus the net credit of 580 is 1920 loss. The roll out is complicated and I will only explain this in an actual class. Spreads can be done on many things and many ways. If you think the stock is falling then you can net credit the calls above the stock price the same way. In this case you sell the 25 call and buy the 30 when the stock is at 22 ½. This will make a net credit as well. If the stock stays below 25 you are home free. A calendar spread is done on buying a lower call and selling a higher call. If the stock is 100 you buy a 90 call 4 months out or more, and sell the 105 or 110 in the closest month like a covered call and keep the premium. You do not want to be called out! Do these far enough out and on resistance so you do not get called out. If you do get called out then you have to exercise the lower 90 call to get the stock to cover your sold 110 or 105 understand? This is why you do not want to be called out. You must practice these kind of trades before using real money or you will get slammed. I teach also how to do these on the OEX or S&P 100. Leaps are also a very powerful way to do spreads. |
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