Here's how an options spread looks when done right

We took a position in a November 20 call (selling) x 22.5 call (buying), which formed a call credit spread. We took in a net credit of $50 in premium per spread following the gap open. The profit/loss parameters can be seen in Figure 2. Immediate movement lower (the ideal scenario), or sideways to moderately higher movement, are all conditions for potentially profiting.

Also known as a bear call spread, the stock immediately declined further, as seen in Figure 3, which helped the trade show a profit even before time value decay could lend a hand.

Figure 1 shows the gap open at 18.00, from a previous close right near 21, which gave us a nice set up to establish a vertical call credit spread

Figure 1 – Generated by OptionVue 5 Options Analysis Software






Figure 2 – Generated by OptionVue 5 Options Analysis Software


Once the stock price moved lower, this November credit spread began getting hit by time value decay. So the initially position delta short position has picked up gains from two dimensions, delta and theta. Delta being negative, we gained from the price declines. And theta being positive, we gained from time value decay. Currently the spread is showing a profit of $40 (ask is 15 cents, bid is 5 cents). Recall that the maximum profit on this trade is $50, so we have achieved 80% of the available potential profit.

Figure 3 – Generated by OptionVue 5 Options Analysis Software


In terms of percentage return on this trade, we would need to divide $40 by the required margin ($225), which gives us a value of +17.8% profit rate. Since there is more than a month still remaining until expiration, it does not make sense to hold this trade open for just $10 extra in profit. The money would be better put to use in a new trade.

Next week, I will follow-up a not so favorable trade outcome which, while profitable, has had a more difficult time. In the meantime, if there are any new setups on the radar screen I will be letting you know.

Have a great weekend!

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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