Underlying Stock – GS (Goldman Sachs)
Strategy – Bear Call (Credit) Spread
The strategy involves selling an Out of the Money Call Option of an underlying stock and buying further out (most often the next strike price) less expensive Out of the Money Call Option for protection. These selling and buying different strike price call options creates a credit and that’s the maximum profit for the trade if successful. Maximum loss will be the difference between sold and bought call option strike prices.
Outlook and Action
Prices traded outside the Bollinger band on Thursday 05 October and Friday 06 October, general tendency is that once it trades outside the Bollinger band, it comes back inside and stays inside for a period of time. Prices came back inside and closed inside on Friday 06 itself and formed a “Doji” candlestick, it’s a indication that prices most likely going to have a short term pull back. Monday 09 October prices opened below last trading days close and had fairly strong down move. Between 05, 06 & 09 October it formed “Evening Star” candlestick pattern, another confirmation that prices are ready to have a short term pull back. Also a sell signal day flashed with my trading system. RSI and MACD Histogram are couple of indicators I use in my system. Notice RSI and MACD both pointing down (shown by green arrow on the chart) on 09 October. I waited next day for prices to follow through the signal day, meaning moving in the same direction as the signal day and as it did I took the trade on Tuesday 10 October. Strike prices were above the recent high from 06 October and outside the upper Bollinger band (purple line in the chart).
| Side | Quantity | Symbol | Expiration date | Strike price | Type | Price | Net Price |
| SELL | 10 | GS | 14-Oct-17 | 250.00 | CALL | 0.22 | $0.12 credit |
| BUY | 10 | GS | 14-Oct-17 | 252.50 | CALL | 0.10 |
Capital required to do this trade was $2500 and have received $0.12 credit per share. Means got paid upfront $98.05 after paying commission for the trade and that’s the profit which turns out to be 3.9% return on the capital invested in 4 days. As long as prices don’t hit the sold strike price by the expiration date (Friday 13 October closing price), these contracts will be worthless and I get to keep the money I received. Below is the calculation.
| Capital requirement/maximum loss | $2500.00 | 10 contracts, each options contract consist of 100 shares, $2.50 spread between strike prices (10 x 100 x $2.50 = $2500). |
| Net profit | $98.05 | ($0.12 x 100 x 10 – $21.95 commission = $98.05 |
P.S Please note that the trade is now closed. Do not copy and place a trade unless you are an expert and know what you are doing. This writing is only for educational purposes. Trading is risky without proper knowledge, practice, expertise and mentorship.