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Options: Trading the Spread

By: Chuck Hughes

My website advisory service has produced $704,298.71 in profits for members over the past year and a half. My advisory service employs a diversified portfolio of strategies with different risk levels. I would like to focus on the Option Strategy Portfolio today. The table below lists the current open trade profit performance as of April 22nd for the Option Strategy recommendations. The option portfolio currently has a $29,915 open trade profit and an average return of 161.3%. When an option is recommended for purchase and the value of the option subsequently increases I will normally recommend selling an option at a later date to create a spread. The call option that is sold has the same option expiration date as the option that was purchased. Selling a call option helps protect the profit on the existing call option purchase.

Maximum Risk $40 with Profit Potential of $960

Both the option that is purchased and the option that is sold to create a spread are normally in-the-money options which offer substantial downside protection if the underlying stock declines in price. For example, the second and third options listed in the portfolio table above (circled) are a 40-Strike and 50-Strike call option spread on a coal company. The 40-Strike call was purchased for 18.60 points and two weeks later the 50-Strike call was sold for 18.20 points. The cost of this spread was .40 points.

18.60 Purchase Price Minus 18.20 Point Sale Premium = .40 Cost

The maximum risk for this spread is $40 per contract. The price of this coal company would have to drop more than 38% before a $40 loss would be incurred. The Call Option Spread Analysis table below shows that the profit potential for this spread is 9.60 points or $960 if the price of the underlying stock increases, remains flat or declines. The $40 risk versus a $960 profit potential produces an excellent reward/risk profile.

The current portfolio profit results demonstrate that this Option Spread Strategy significantly reduces risk and is a great way to profit during the current unpredictable markets. All of the recommended trades are currently profitable except for the Steel Company recommendation listed in the first row which was recommended recently.