UTEK Got Hammered On Friday...Here's An Options Setup For Monday

This type of chart setup and option volatility condition lends itself to a net selling approach. Here I am looking at a November 20 x 22.5 call credit spread (aka bear call spread), which is going for $50. The trade has $225 in maximum risk, with upside breakeven is at 20.50, and no downside risk. While upside loss is limited, the best way to manage this time-value decay trade is to exit if one of the following conditions occur:

1. The premium you collected doubles
2. The stock price touches the short leg

As you can see from Figure 2, if the underlying were to move directly to the short strike, you would experience about a $75 loss on the trade, which is certainly manageable. It is essential, however, to trade a large basket of these types of trades to diversify risk. You need to make sure they are dispersed in a mix of industry groups, as well.

Figure 2 - Created using OptionVue 5 Options Analysis Software.

The legs of this spread are contained in Figure 3, showing that we would collect $95 for the November 20 call and pay $45 for the November 22.5 call. This leaves us with a net credit of $50, which if profitable, would yield a rate or return of +22.2% during a period of 92 calendar days, or an annualized rate of return of +88% (not including commissions, slippage and fees).

UTEK Bear Call Spread Prices

UTEK Bear Call Spread Premium
Sell November 20 Call +$95
Buy November 22.5 Call -$45
Net Credit/Debit +$50

Remember to always have a trading plan, and to trade that plan smartly.

Cheers!

John Summa

John F. Summa is Founder and President of OptionsNerd.com, and a registered Commodity Trading Advisor (CTA) with the National Futures Association (NFA). Founded in 1998, OptionsNerd.com offers trading seminars and tutorials to options traders, futures and option trading advisories and managed futures and options CTA account services. Mr Summa's trading articles have appeared in Technical Analysis of Stocks & Commodities magazine, as well as Active Trader Magazine, Options Trader Magazine, Futures Magazine, Stock, Futures & Options Magazine, and Investopedia.com. He coauthored Options on Futures: New Trading Strategies and Options on Futures Workbook (John Wiley & Sons, 2001) and more recently wrote the groundbreaking book, Trading Against The Crowd: Profiting From Fear and Greed in Stock, Futures and Options Markets (John Wiley & Sons, 2004), which includes Mr. Summa's innovative quantitative bear and bull news-flow Contrarian indicator. Mr. Summa is a PhD-trained economist and operates a delta-neutral options trading CTA program.

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