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.
Example: XYZ stock is trading at $50
Outlook: You are neutral on XYZ stock short term.
Possible strategy: Buy Time Spread to take advantage of short term time decay.
Sell one June 50 strike call at $2.50
Buy one July 50 strike call at $3.75
Net Debit $1.25
- Maximum Profit = Long call value at near term expiration - Net Debit
- Maximum Loss = Net Debit paid for spread $1.25
In SUMMARY: This spread will be profitable if XYZ stabilizes to the at-the-money strike at June expiration. Maximum profit depends on the value of the long call at near term expiration. Maximum loss is equal to the debit paid for the spread.