Trading with Options can be safer than shares….
Have you wished you could profit from a stock price rise without owning the shares?
Then let me show you a way, using options, which will limit your losses and carries less risk than owning the shares outright.
How would you like to rent that option out at the same time, receiving additional income, and reducing the amount you have at risk even more?
Let me introduce you to a “Vertical Spread”.
It’s a bull-call spread option trading strategy, so when you think that the price of a stock will go up moderately in the near term, you can reduce your risk.
To construct a Bull call spread you buy an at-the-money call option and sell an out-of-the-money call option, of the same expiration month. It is also known as the “bull call debit spread” as a debit is taken upon entering the trade.
The maximum gain is reached for the bull call spread options strategy, when the stock price moves above the higher strike price of the two calls, and it is equal to the difference between the strike price of the two call options minus the initial debit taken to enter the position.
To put it simply, a Vertical Spread is an options trading strategy with which a trader makes a simultaneous purchase and sale of two options of the same type that have the same expiration dates, but different strike prices. The widening or narrowing of the difference between the option premiums on the two positions, determines the profits.
The formula for calculating maximum profit is given below:
• Max Profit = Strike Price of Short Call – Strike Price of Long Call – Net Premium Paid – Commissions Paid
• Max Profit Achieved When Price of Underlying >= Strike Price of Short Call
The bull call spread strategy will result in a loss if the stock price declines at expiration. The maximum loss cannot be more than the initial debit taken to enter the spread position.
The formula for calculating maximum loss is given below:
• Max Loss = Net Premium Paid + Commissions Paid
• Max Loss Occurs When Price of Underlying <= Strike Price of Long Call
Bull Call Spread Example
If you believe that XYZ stock trading at $42 is going to rally soon, you buy a March 40 call for $300 and sell a March 45 call for $100. The net investment required to put on the spread is a debit of $200.
If you bought the equivalent of 100 shares your investment would be $420.
The stock price of XYZ begins to rise and closes at $46 on expiration date. Both options expire in-the-money with the March 40 call having an intrinsic value of $600 and the March 45 call having an intrinsic value of $100. This means that the spread is now worth $500 at expiration. Since the debit was $200 to enter the trade the net profit is $300.
If the price of XYZ had declined to $38 instead, both options expire worthless. You will lose the entire investment of $200, which is also the maximum possible loss.
If you owned the shares at $42 and it is at $38.00 you would incur a $400 loss so using the option has reduced your loss.
To find out more about this strategy, join our 3-hour vertical spread training webinar, including 4 weeks of follow up live-trading sessions, starting on Wednesday 222nd February.
This is an excellent opportunity to expand your knowledge and have another strategy available to make you a more profitable trader. We hold these training webinars only once a year and run them live to keep the information current and relevant to the market right now. This is great strategy for a conservative trader with limited funds. You will learn how to create a trading plan using the strategy that suits your risk profile. Visit https://www.stockcourse.net/wl?3i9=7t16325 to learn more.
