Updated: Jul 19, 2019
Update → Effective September 9, our GTC order on the AAPL March 100/110 Call spread was filled @ $5 flat
We will be placing a GTC (good to cancel) limit order today on the AAPL March 17 100/110 Vertical Call Spread at a gtc limit order of $5. Max value is $10 (100% return) so long as AAPL closes at or above $110 by March 17 expiration.
Before going over this, I want to acknowledge that many of our members already are familiar with the mechanics of Call Spreads and how they're used & what the advantages they have over the purchase of lone wolf open calls.
If you're not familiar with call spreads yet & or the differences how they can be far superior to then single calls, please read on. We will go much deeper on the subject & strategy employed at a later time. For now here is general overview.
BotTrigger Long Holdings (Stocks) vs BotTrigger Catapult (Options)
Not all investors are looking for consistent out-performance of the S&P 500 by taking advantage of buying great stocks at discount pullbacks, or by exploiting extreme oversold indicators. Some investors would rather have pocket trades with potentially oversized returns that exceed what’s possible by simply buying uptrending stocks on pullbacks &/or momentum breakouts. As it is right now in the Long Holdings, when BotTirgger issues a trade alert, it’s predicated on going long the “stock” in particular. Although in many cases, one could use that as a gauge to discern directional trend and apply the trade alert to an options trade. However, it’s important to note that, in many instances the behavior of an options position could poorly track the stocks underlying performance. So even though a stock would be trending higher, it might not move as fast as the directional volatility required to really move the needle on an options premium.
There are instances where BotTrigger will go long but realize that it’s ok to trade sideways or consolidate in a new range, resting while the stock gets ready for another leg higher. Options in this particular case would not be advisable in such a situation as an options theta / time decay would eat away at the value of an options premium over time. And there are certainly ways to adjust and hedge for theta decay which we will discuss.
With that being said, we will engage certain option trades to hunt alpha on oversized returns, but these trades are modeled for with extra attention and timed differently than going long the stock. Timing is one component and then of course the “type” of option that is used needs to be carefully considered. There are trades that option-junkies & newbies put on, and there are trades that the big boys put on. We’ll be focusing on trades that big boys & more sophisticated investors put on.
The aim of this trade is to leverage accelerated returns by capitalizing on high probability technical setups in the market where the risk reward is conservatively obvious.
One such trade we’ll be modeling for is an Apple trade where you can make 100% ROI (return on investment) so long as the share price is at or above the $110 level, by March of 2017. The trade we’re targeting is the AAPL 100/110 March 17 Call spread, aka Bull Spread. What this means is that you’re creating a simultaneous execution order going long the 100 strike calls & selling the 110 calls (same expiration month), the result of which is known as a Vertical Call Spread. Right now that spread is trading for $5.53. We want this trade @ $5 flat.
If we can get some further weakness on AAPL this week and watch it pullback another 2 points or so, the trade could easily get down to $5 flat, which would yield double so long as AAPL closed @ $110 or higher by March of 2017. Let’s go over the trade profile here:
AAPL March 17 100 / 110 Call Spread:
Cost = $5 per 1 contract = $500
Max Value = capped at $10 so long as AAPL stock closes at $110 or higher.
Example → If AAPL goes to $200 a share by March, then the value of this spread is still just $10
Breakeven = AAPL @ $105 you wouldn’t lose/make a solitary dime
Downside = $4.99-0.
Example → If AAPL closed at $104 by March expiration then you would have lost $1 of that $5 cost. So you’d have $4 left. If AAPL closed at $100 by March expiration, then the position would be worth $0
Call spreads are, in many ways, superior to that of just buying an outright call. Here in a call spread you are essentially & partially hedged by selling the short call (110) against your long call (100 srike). What this does is it help eliminate the theta decay buying open calls are known for. Furthermore, when you buy a call on it’s own, your breakeven is significantly higher and your 2x value is much farther then in the example of the spread.
Let’s say you want to buy the March 100 Call on it’s own. Currently that call is going for $11.20. Let’s compare the profile on this particular trade of just buying the March $100 call strike:
Cost = $11.20 per 1 contract = $1120
Max Value = infinite
2x Value = AAPL would have to be at $122.40 for this position to double in value.
Breakeven = AAPl @ $111.20 and you wouldn’t lose or make a solitary dime.