Call Spreads 101: Introducing This Low-Risk Option Trade
This week, we talked about how to take advantage of Lordstown Motor’s doomed future…
Prepared for an upcoming VIX gamma squeeze…
Jumped on an American Airlines asymmetrical trade…
And walked through today’s quadruple-witching day.
But we aren’t done yet.
Every week, I get an influx of questions straight from Profit Takeover readers. And this week was no exception.
Today, I’m answering the top questions of the week.
I’ll walk you through my biggest moneymaker in 20 years of trading…
Take a deep dive into the call spread strategy…
And tease an exciting update to come.
You don’t want to miss today’s mailbag issue.
Every day here in Profit Takeover, we talk about the VIX. It’s the single tool that’s made me the most amount of money in my 20 years of trading, after all.
And Bruce, rightfully so, wants to know more:
As a refresher, here’s how my VIX light works:
A red light means volatility is likely to drop. A yellow light means a strong move is expected in either direction. And a green light means volatility is likely to increase.
My VIX light has been red for weeks now, as I expect the VIX to drop to sub-15 levels by the Fourth of July. The moment that changes – whether the light turns yellow or green – I’ll send a message directly to your inbox.
What exactly qualifies my light turning green? Well, Bruce, I’m glad you asked. Because this week, I put together a new report – The VIX: My Biggest Moneymaker in 20 Years of Trading.
In this report, I dive deep into the inner workings of the VIX – and how I choose the color of my VIX traffic light every single day.
You can give it a read right here.
The VIX is an important tool to have in your trading arsenal, especially as you fight to put Wall Street’s financial power into your hands.
And with our next question, I’m bringing you a more advanced options trading strategy for your arsenal – one that cuts your risk immensely.
I’ve mentioned call spreads a few times here at Profit Takeover – most recently as a trade idea on Senseonics Holdings Inc. (NYSEAMERICAN:SENS).
But I’ve never recommended an official call spread trade for the portfolio.
That’s because this strategy requires a higher level of options clearance. And I’m trying to show you how an average, beginner trader can outsmart Wall Street – something you don’t need high clearance to do.
That said, call spreads are easy to understand. And adding them to your trading arsenal is a great idea.
Let’s boil it down. A bull call spread, or a call debit spread, involves buying one call while simultaneously selling another with the same expiration date, but a higher strike price.
Take the SENS example I mentioned on Monday…
“A cheap way to play SENS? I’m going far out, looking at the January 2022 $3-$10 call spread for just $1.05.”
As I type, the SENS January 21, 2022 $3 call is running for about $1.75. The January 21, 2022 $10 call is about $0.82. Same expiration, different strike price.
So, say we buy (to open) the $3 call and sell (to open) the $10 call at the same time…
SELL January 21, 2022 $10 Call +$0.82
Net debit of $0.93
As you can see, the premium received from the call you sell will partially offset the cost of the option you buy – cutting your risk by almost half, in this example.
If SENS moves up as anticipated, then both of these options will gain in value, just like a typical bullish call option strategy. But unlike buying a single long call option, your upside profit potential is capped.
Your max profit is equal to the strike price of the call you sold, minus the strike price of the call you bought, minus the net premium paid for the spread.
In this case, that max potential profit is $10 – $3 – $0.93 = $6.07. And it’s reached when the price of the underlying is at or above the strike price of the call you sold – in this scenario, $10.
But keep in mind, you only paid $0.93 for the trade. If you close out the debit spread for $6.07, then you’re sitting on a 550%-plus gain. That’s an asymmetrical profit I’d take in a second, especially for such a cheap buy-in.
Remember, this trading strategy requires a higher level of options clearance – Level 3, at most brokerages – so I won’t recommend any spread trades in Profit Takeover for now. But it’s a great strategy to use when playing more expensive stocks, like the FAANGs.
Now, if you’re eager for more trade recommendations, then pay attention to our third and final mailbag question…
Well, Janet, your answer is no.
Everything I’ve given you here at Profit Takeover is completely free, and it always will be. All of my articles, live streams, trading picks, and reports are yours at no charge.
I’ve had more than a few people ask me why I do this for free. And it all comes back to our goal here at Profit Takeover – to put financial power back into the hands of the people.
I want to show you just how within reach real money and real financial power really is for the average trader. You don’t need an Ivy League degree, a million-dollar trading account, or years of experience to have success in the markets.
You just need to want to learn. And I’m here to teach you.
That said, if you’re interested in receiving more trades…
More market education…
And more Mark, then stay tuned.
Because we have exciting things coming in the near future.
But no matter what, I’ll always be here in the Profit Takeover, bringing you the best strategies of the week… for free.
That’s not going anywhere.
Enjoy your weekend,
Mark Sebastian
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June 18 2021
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