Underlying Stock – FDX (FedEx Corporation)
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 from Wednesday 30 August till Friday 01 September, general tendency is that once it trades outside the Bollinger band, it comes back inside and stays inside for a period of time. Monday 04 September was market closed (Labour Day) and on Tuesday 05 September, prices came back inside the Bollinger band and closed below the opening price. RSI and MACD histogram both pointing down combining with short term reversal signal on 01 September by a “Gravestone Doji” candlestick pattern gave me the confidence to take the trade. Strike prices were above the most recent high from 01 September (shown by the red line in the chart) and obviously outside the upper Bollinger Band.
| Side | Quantity | Symbol | Expiration date | Strike price | Type | Price | Net Price |
| SELL | 10 | BABA | 09-Sep-17 | 217.50 | CALL | 0.29 | $0.21 credit |
| BUY | 10 | BABA | 09-Sep-17 | 220.00 | CALL | 0.08 |
Capital required to do this trade was $2500 and have received $0.21 credit per share. Means got paid upfront $188.05 after paying commission for the trade and that’s the profit which turns out to be 7.5% return on the capital invested in 4 days. As long as prices don’t hit the sold strike price by the expiration date (Friday 08 September 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 | $188.05 | ($0.21 x 100 x 10 – $21.95 commission = $188.05 |
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.