Strategies

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Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Front Spread

Example:                 XYZ stock is trading at $43 

Outlook:                  You are slightly bullish on XYZ stock over the next 30 days and forecasting minimal volatility in the near term.  

Possible strategy:    Front Spread

                                  Buy one 30-day 40 strike Call at  $4.00

                                  Sell two 30-day 45 strike Calls at $2.00

                                                                                   $0.00

*All values shown are at the time of expiration. Commissions and other trading fees not included.

Stock

Long Call
Profit/(Loss)

Short Calls
Profit/(Loss)

Net
Profit/(Loss)

40

$0

$0

$0

45

$5

$0

$5

50

$10

($10)

$0

55

$15

($20)

($5)

 

 

At Expiration:

  • Maximum Profit = Difference in Strike Prices + or - Net Premium Paid/Received

      (45 - 40) + 0 = $5  

  • Lower Breakeven = Long Call Strike + or - Net Premium Paid or Received

      40 + $0 = $40

  • Upper Breakeven = Short Call Strike + Maximum Profit

      45 + $5 = $50

  • Maximum Loss = Unlimited upside risk

In Summary: Maximum profit for a Front Spread is when the stock price matches the strike price of the options sold.  The long Call will expire in the money while the Calls you sold will go out worthless.  Maximum loss can be unlimited with the uncovered Call that you sold.

CBOE Volatility Index (VIX)