An Option Strategy I Have Known and Loved

  • SumoMe

Sometimes it pays to look at old ideas in new ways.  This article details a unique approach to a simple option trading.  I refer to it as a longer-term bull call spread.  The basic idea is this:

-Find a bull call spread (i.e., buy a lower strike price call and sell a higher strike price call) with a lot of upside potential and a lot of time left until option expiration.

-If and when the trade shows an open profit of +30% or more, then adjust the position in order to lock in profits/reduce risk.

-Ideally you will have some criteria for picking a stock in the first place that you think has the potential to advance in price at some point in the months ahead.

Here is one example of such a trade using options on Exxon (XOM).  For the record, this is not a “recommendation”, but rather a useful example of what to look for.

As this is written XOM is trading at about $86 a share.  The trade – as displayed in Figures 1, 2 and 3 – involves buying the April 2014 90 call and selling the April 2014 95 call.  In this case I am using a quantity of 12, i.e., buying 12 of the 90 calls and selling 12 of the 95 calls. 20131010-01Figure 1 – XOM Bull Call Spread; 317% profit potential, 7.28% to Double (courtesy: www.OptionsAnalysis.com)

20131010-02

Figure 2 – XOM Bull Call Spread; 190 days until option expiration (courtesy: www.OptionsAnalysis.com)

In Figure 1 we see the trade has profit potential of +317%, and the Bullish % to Double is 7.28%.  This implies that if the stock rises from $86.04 to $92.30, this position will double in value (i.e., show an open gain of 100%).  But as I mentioned earlier, I am looking only for a profit of 30% before making some sort of adjustment.  A 12-lot cost $1,440 so our first profit target is $360.   

20131010-03 Figure 3 – XOM needs to rise only to about $88 a share to trigger 30% profit (and adjustment) target (courtesy: www.OptionsAnalysis.com)

In order to net a +30% open profit XOM needs only to rise to roughly $87.90 a share.  This target price may rise over time due to time decay, but the other thing to note is that this trade has 190 days left until expiration.  So time decay is not a serious consideration at the moment.  Now is it possible that XOM will suffer a near-term decline and never get to a price that will trigger an adjustment?  Of course!  Hey, wlecome to the exciting world of trading.

But a close look at Figure 4 suggests that it just would not take much of a “pop” in the price of XOM to generate a 30% open profit, which one can then adjust into a position with lower risk.20131010-04Figure 4 – Not much of a move up required to trigger 30% profit (and adjustment target) (courtesy: www.OptionsAnalysis.com)

Summary

Again, this trade is not a “recommendation”, merely an example of a trade that has:

-Good upside potential

-A relatively close profit target (i.e., to trigger a +30% open profit)

-A lot of time for a profit to accrue

If you are interested in more information on this type of trade, please read about my new video entitled “How to Find Longer-Term Bull Call Spreads”, for sale now on www.JayOnTheMarkets.com.

The 60-minute video (found here http://tinyurl.com/k5o4lex) goes into a great deal more detail and spells out a step-by-step approach to finding trades just like the XOM example shown here.

Jay Kaeppel

 

Leave a Reply

Your email address will not be published. Required fields are marked *

This blog is kept spam free by WP-SpamFree.