Today we're going to trade a Debit Vertical Spread Option, also called a Bull Call Vertical Spread. This type of options trading strategy
involves two options, buying one Call Option at a lower strike price, and then selling one call Option at a higher strike price. When
you buy an Option, the Premium that you pay is immediately taken from your account, it's a debit. However, when you sell an Option, the Premium that you pay is immediately put into your account, it's a credit. So if you trade a Vertical Spread, you subtract the credit from the debit giving you a net debit Premium. The Premium from buying the Option is always more expensive than the Premium from selling the Option.
The purpose of a Debit Vertical is to reduce the upfront Premium, thereby reducing the amount of risk. If you just buy the Option, you have to pay the full debit. But it's a risk/reward game. If you just buy the option, your potential profit is unlimited. If the stock goes up, you can keep wining until your Option expires. But with a Vertical Spread, your potential profit is limited to the width of the two Options.
We like to trade SPY options. The spread between strike prices is 1 point. Brokerages always post their Premiums as 1, but sell in multiples of 100. So let's look at an example to make this clear. Vertical Spreads apply to all brokerages that offer Options.
Currently, SPY is trading at $442.87. We always want to use "At the Money" options for day trading. Since we need 2 options, we'll buy
the $442 for the lower strike and $443 for the sell at the higher strike.
If we just bought the call option with unlimited profit potential, the Premium posted is $2.94 x 100 = $294. Since we're doing the spread and selling the higher strike, $443, with a Premium of $2.36, or $236, then our total cost = $294 - $236 = $58. Remember, since a Vertical is limited to the width of the two strike prices, in this case, 1, or $100, our max profit can be $100 - $58 (what we paid for the Premium) = $42.
But if we get the max profit, that would be a 72% return on investment. And the maximum that we can lose is our Premium, $58. Not bad for a day trade.
Here's where SmartOptionsClub comes into play. In fact we sent a real time Bell Alert to our clients to notify them that SPY was going up.
In fact we sent several Bell Alerts. A Bell Alert tells our clients that it is time to buy. As you can see, we issued several Bell Alerts to our clients.
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Clicking on the link that is attached to the Alert, our clients can see the technical chart overlays. That chart is a 1 minute chart, so we had plenty of time to enter the trade.
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At the time we entered the trade, SPY was trading at $441.61.
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And here's what happened. You can see that SPY went up and so did our Option. In less than one day we were already profitable by $29..
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Be sure and watch our SmartOptionsClub Blog. We're posting our trades regularly there.
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