Explore Your Options  |  JAN 2005

Explore Your Options by Tom Gentile

Stocks & Commodities V. 23:1 (73): Explore Your Options by Tom Gentile Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. WHAT WENT WRONG? I am wondering if someone can please explain what happened during this paper trade: Sell two YHOO January 2006 35 calls at 3.8 and buy two YHOO January 2006 27.5 calls at 6.8. The maximum risk equals $300, maximum reward is $450, and the breakeven equals 30.5. I closed out both sides of the trade when the stock was above 35. My gain was only around $200 total. Since my maximum reward was $450 and I had a quantity of two, shouldn’t it have been around $900, considering the stock price was above the short call? The trade you outlined is a bull call spread. In this trade, you are buying a call with a lower strike price and selling a call with a higher strike price. So in your example, the cost of the trade is $300 per spread, or 6.8 – 3.8 = 3 * 100. . .

by Tom Gentile