Passive Directional Trading: Low Risk/High Returns
The underlying stock XYZ is trading 35 per share. Your outlook is that the stock will trade neutral to down.
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.
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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