Underlying Stock – AMZN (Amazon)
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 13 September, came back inside on 14 September and between 13 & 14 September it formed a bearish ‘Harami’ candlestick pattern. On Friday 15 September, a Sell Signal flashed with the technical indicators I use, means prices are ready to have a short term pull back. On Monday 18 September, as prices followed through the sell signal I took the trade. Strike prices were outside the upper Bollinger band and above the most recent high from 13 September. ‘Out of the Money’ probability at expiration was at around 90%, meaning 90% chance of succeeding in this trade and the most exciting part is that you know this before you take the trade. No red flag.
| Side | Quantity | Symbol | Expiration date | Strike price | Type | Price | Net Price |
| SELL | 10 | AMZN | 23-Sep-17 | 1015.00 | CALL | 1.25 | $0.15 credit |
| BUY | 10 | AMZN | 23-Sep-17 | 1017.50 | CALL | 1.10 |
Capital required to do this trade was $2500 and have received $0.15 credit per share. Means got paid upfront $128.05 after paying commission for the trade and that’s the profit which turns out to be 5.1% return on the capital invested in 5 days. As long as prices don’t hit the sold strike price by the expiration date (Friday 22 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 | $128.05 | ($0.15 x 100 x 10) – $21.95 commission = $128.05 |
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.