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Friday, May 15, 2009

Half in the Money Option Spread Strategies

As the May options expiration winds down, I am searching for option spreads to open for June. Normally I implement this strategy with 30-40 days until expiration as we have 36 days until expiration. This strategy has worked quite well for me over the last 3 months of using it.

I use this strategy for both Puts and Calls. Below are some of my latest “half in the money” option spread strategies. I call them half in the money, because the current price of the stock is very close to being exactly in-between both option strike prices. The current bull/bear ratio is also given after each company and ticker. I use the bull/bear ratio screener to get ideas of how strong and weak specific stocks are. For a detailed list of the components in the Bull/Bear Ratio I use click here. If the bull/bear ratio is high I'll be using the call strategy, if it is low I'll be using a put strategy, if the stock is range bound I'll make my decision based on other criteria or wait until it becomes more bullish/bearish.

Company (Ticker), Bull/Bear Ratio, Strategy (prices and probabilities as of pre-market Friday May 15, 2009).

Apple (AAPL), 6:4, Buy the June 120 Call and sell the June 125 Call. Risk $2.75 per share, potential payoff if AAPL closes at expiration above $125 is $500 (net of $225 or 81%). The current options market is factoring in a 47% chance of the 125 Call option expiring in the money.

Google (GOOG), 6:5, Buy the June 370 Call and sell the June 410 Call. Risk $19.80 a share, with a chance of making $4,000 (net of $2,020 or 102%) if Google closes above $410 at June expiration. This option spread needs Google to close at $389.80 come expiration to break even, everything above until $410 is profit. The current probability of this spread paying the maximum profit is 30.6%.

Palm (PALM), 10:1, Buy the June 9 Call and sell them June 13 Call. Risk $180, with a chance of making $400 (net of $220 or 122%) if Palm closes above $13 at June expiration. The options market is giving this spread a 30% probability of expiring at maximum profitability.

Research in Motion (RIMM), 7:3, Buy the June 65 Call and sell the June 75 Call. The total risk for this position is $510 with a chance of $1000 (net of $490 or 96%). The current probability of RIMM expiring at or above $75 come June expiration is 43.5%

First Solar (FSLR), 8:3, Buy the June 175 Call and sell the June 185 Call. Total risk is $500 with the chance of $1000 (net of $500 or 100%) if FSLR expires at or above $185 a share come June expiration. The current probability of FSLR expiring at or above $185 is 48.7%.

Goldman Sachs (GS), 9:2, Buy the June 130 Call and sell the June 140 Call (strategy not exactly in the middle GS at $133.60). Total risk is $480 with the chance of $1000 (net of $520 or 108%). The options market is currently pricing in a 38.8% chance GS will expire at or above $140 a share at June expiration.

S&P SPDR (SPY), 6:4, Buy the June 87 Call and sell the June 91 Call. Risk $2.23 per share, with a potential payoff of $400 (net of $177 or 79%) if SPY closes at or above $91 on June expiration. The current probability of this position paying the maximum is 44.1%.

Caterpillar (CAT), 6:5, Buy the June 34 Call and sell the June 38 Call. Total risk of $192 with a potential payoff of $400 (net of $208 or 108%) if CAT closes at or above $38 on June expiration. CAT is current .15 (15 cents) above the break even point. The options market is factoring in a 39.5% chance the CAT June 38 Call option expires in the money.

Celgene (CELG), 3:7, Buy the June 45 Put and sell the June 35 Put. Risk of $450 with a chance of $1000 (net of $550 or 122%) if CELG expires at or below 35 on June expiration. The current probability this option spread will pay its maximum is 13.4%.

Dryships (DRYS), 3:8, Buy the June 7.50 Put and sell the June 4 Put. Total risk of $160 per contract with a chance of $350 (net of $190 or 118%) if DRYS closes at or below $4 on June option expiration. The current probability this option spread will pay its maximum is 15.5%.

Bank of America (BAC), 7:4, Buy the June 10 Call and sell the June 12 Call. Total risk of $1.00 per share with a potential payoff of $2.00 a share (net of $1 per share or 100%) if BAC closes at or above $12 on June expiration. The current probability BAC will close at or above $12 by June expiration is 54.9% according to the options market.

Ford (F), 6:4, Buy the June 4 Call and sell the June 6 Call. The total risk of opening this position is $101 per contract with a potential of making $99 profit per contract or a 98% return if Ford closes at or above $6 on June expiration. The current options market is factoring in a 39.7% chance Ford will close at or above $6 on June expiration.

Note that any of these spreads can be traded before expiration to capture a gain. If you'd like to learn more about options trading, check out my option trading E-Book.


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4 comments:

JW said...

Marco,
Thanks for the great blog, I find it very useful. Try to read it everyday. I had a question on your "Half in the Money Option Spread Strategy" - When you sell the call with the higher strike price is this a naked call or a covered call? I don't have the ability to sell uncovered options and don't think there is an institution out there that would let me.
Regards,
Jesse

Marco H said...

JW thanks for your comment. You need this approved by your broker. It is not naked if you purchase the lower call first, then you can sell the rights to your shares (that you may possibly get) at a higher strike price. It is technically writing a covered call on a purchased call option. Let me know if you have any other questions.

JW said...

Marco H, that makes sense on how to buy a call and then sell a call with a higher K. Curious how you price your options and calculate the percent chance it will achieve that price? I scanned your blog to see if you went over a methodology or good program that you used, but couldn't find anything. Thanks.

Marco H said...

JW, the probability is the calculated delta value. The calculation is tough but not impossible, however most brokerages give some sort of options calculator and this should be part of it. When looking at Puts it is 1 - the delta value. If you still need help let me know.

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