Out-of-the-Money Call Credit Spread
Example: Stock 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 July 75 strike call at $2.10
Buy one July 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. Ideally you would like both options to expire worthless at expiration. The profit and loss of this trade is limited to the credit received.