For those readers looking to improve their trading results and create the unfair advantage they deserve, I have just posted a new 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 across many asset classes this year, and they are a major reason why I am up 40%.
To understand this trade, I have used the recent example of Apple, which I executed on July 10, 2014. I felt very strongly that Apple shares would rally into the release of their new iPhone 6 on September 9, 2014.
So followers of my Trade Alert service received text messages and emails to add the following position:
Buy the Apple (AAPL) August, 2014 $85-$90 in-the-money bull call spread at $4.00 or best
To accomplish this, they had to execute the following trades:
Buy 25 August, 2014 (AAPL) $85 calls at????..?$9.60
Sell short 25 August, 2014 (AAPL) $90 calls at??..$5.60
This gets traders into the position at $4.00, which cost them $10,000 ($4.00 per option X 100 shares per option X 25 contracts).
The vertical part of the description of this trade refers to the fact that both options have the same underlying security (AAPL), the same expiration date (August 15, 2015) and only different strike prices ($85 and $90).
The breakeven point can be calculated as follows:
$85.00 Lower strike price
? $4.00 Price paid for the vertical call spread
$89.00 Break even Apple share price
The great thing about these positions is that your risk is defined. You can?t lose anymore than the $10,000 you put up.
If Apple goes bankrupt, we get a flash crash, or suffer another 9/11 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 Apple traded at or above $89 on the August 14 expiration date, you will make a profit on this trade.
As it turns out, my read on Apple shares proved dead on, and the shares closed at $97.98 on expiration day, or a healthy $8.98 above my breakeven point.
The total profit on the trade came to:
($1.00 X 100 X 25) = $2,500
This means that the position earned a 25% profit in little more than a month. Now you know why I like Vertical Bull Call Spreads so much.
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.