Categories  Income Selling Options Vertical Spread Trading

Passive Directional Trading: Low Risk/High Returns

passiveDiredtionalTrading
This strategy is an example of :  PASSIVE DIRECTIONAL TRADING

The underlying stock XYZ is trading 35 per share.  Your outlook is that the stock will trade neutral to down.

The use of the Vertical Bear CreditVerticalBearishCreditSpread Credit Spread:

Sell one out-of-the-money CALL and buy a higher strike to limit the risk of the spread.  This spread is placed and you get a credit of $45 to your account per option.

Possible Outcomes:

Best Case: At expiration the stock price is 45 or LESS (ten dollars above the current market price) and you keep the $45  credit per option.

Worst Case: The stock is up to 50 or higher and you lose $500 minus the credit of $45 you received.

This trade wins if:

1) stock stays the same
2) stock goes down any amount
3) stock goes UP but not above 45

This is a case where the payoff is relatively small but the probability of profit is very high – as it is unlikely the stock price will exceed 45 at expiration.

As long as the stock price is 45 or below at expiration, you do nothing, the credit to your account stays.


 

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