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.

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  

At Expiration:

  • 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.     

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