Out-of-the-Money Call Credit Spread
Example: Stock is trading at $68
Outlook: You are neutral to bearish and would like to generate income from short term time decay.
Possible strategy: Credit Spread
Sell one 30-day 75 strike call at $2.10
Buy one 30-day 80 strike call at $1.10
Net Credit $1.00
- Maximum Profit = Net Credit Received
- Maximum Profit = $100
- Breakeven = Short Call Strike + Net Credit Received
- Breakeven = 75 + $1 = $76
- Maximum Loss = Difference in Strike Prices - Net Credit Received
- Maximum Loss = 5 - 1 = $400
In Summary: An out-of-the money Credit Spread strategy is executed when an options trader believes the price of the underlying will have a narrow range in the near term. The profit of this trade is limited to the credit received. Upside losses are limited with the purchase of the out-of-the-money call. Ideally you would like both options to expire worthless at expiration.