For those readers looking to improve their trading results and create the unfair advantage they deserve, I have posted training video on How to Execute a Vertical Bull Call Spread.
This is a pair of positions in the options market that will be profitable when the underlying security goes up, sideways, or down small in price over a defined period of time.
It is the perfect position to have on board during markets that have declining or low volatility, much like we have experienced over the past year.
I have strapped on quite a few of these babies across many asset classes over the years and they are a major reason why I was up 59% in 2017, with the main index gaining a lowly 20%.
To understand this trade, I have used an example of Facebook, for which I shot out a Trade Alert recently.
Followers of my Trade Alert service received text messages and emails to add the following position:
Trade Alert – (FB) – BUY
BUY the Facebook (FB) February, 2018 $160-$165 in-the-money vertical bull call spread at $4.10 or best
To accomplish this, they can execute the following trades:
Buy 24 February, 2018 (FB) $160 calls at……………………………..$19.00
Sell short 24 February, 2018 (FB) $165 calls at………………………………$14.90
This gets traders into the position at $4.10, which cost them $9,840 ($4.10 per option X 100 shares per option X 24 contracts). The vertical part of the description of this trade refers to the fact that both options have the same underlying security (FB), the same expiration date (February 16, 2018) and only different strike prices ($160 and $165).
The great thing about these positions is that your risk is defined. You can’t lose any more than the $9,840 you put up.
If Facebook goes bankrupt, we get a flash crash, or suffer another Brexit type event, you will never get a margin call from your broker in the middle of the night asking for more money. This is why hedge funds like them so much.
As long as Facebook closes at or above $164.90 (The lower $160 strike price plus your $4.10 cost) on the February 16 expiration date, you will make a profit on this trade.
At the time, Facebook traded at $177.39. So the stock could fall by $12.49, or a hefty 7.04% over the next 22 trading days, and you would still make a profit on the trade.
The shares only need to close at $165 on expiration day for you to capture the maximum potential profit, which can be calculated as:
$5.00 – $4.10 = $0.90
($0.90 X 100 X 24) = $2,160, or a gain of 21.95%.
That is not a bad profit in this ultra-low return world.
Now you know why I like Vertical Bull Call Spread so much. So do my followers.
Occasionally, these things don’t work. As hard as it may be to believe, I am not infallible.
So, if I’m wrong and I tell you to buy a vertical bull call spread, and the shares fall not a little, but a lot, you will lose money.
On those rare cases when that happens, I’ll shoot out a Trade Alert to you with stop-loss instructions before the damage gets out of control.
To watch the video edition of How to Execute a Vertical Bull Call Spread, complete with more detailed instructions on how to execute the position with your online platform, please click here.