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Option Spreads

An option spread is created when one option is purchased and another is sold simultaneously.  The two options typically have different strike prices or expiration dates, and the trader who placed the spread order only has to come up with the cash difference between the option being bought and the one being sold.  An option spread generally has a lower degree of risk and maximum profit potential than the outright purchase or sale of a single option.

Credit Spreads

Debit Spreads

Vertical Spreads

Iron Condor

TERRY’S TIPS STOCK OPTIONS TRADING BLOG

September 26, 2022

Housing Poor

Homebuilding stocks got a boost early in the week after a prominent housing analyst upgraded the entire sector, including a rare “double upgrade” for Lennar (LEN) from underweight to overweight. The rationale was that housing tends to outperform coming out of a bear market and that “early pain = early gain.”

Now, he could very well be right … at some point. Housing stocks, along with the broader market, will eventually pull out of this bear market. But that’s off in the future. We’re still in the “early pain” phase.

LEN got a boost from the news but then trended lower after a mixed earnings report and another 75 bps rate hike from the Fed (with more to come). The stock could not pierce its declining 20-day moving average (blue line), which has kept a lid on LEN’s rally attempts after turning lower two months ago. Furthermore, the 50-day moving average (red line), which is now headed lower, sits overhead, ready to provide resistance.

This trade is based on more “early pain” for the homebuilders based on rising interest rates, mortgage rates at 14-year highs and the looming prospect of a recession. We are playing a call credit spread with the short call sitting above the 50-day, meaning that LEN will have to overcome two points of resistance to move the spread into the money.

If you agree that LEN will continue to slide lower, consider the following trade that relies on the stock staying below $82 (green line) through expiration in six weeks:

Buy to Open the LEN 4Nov 85 call (LEN221104C85)
Sell to Open the LEN 4Nov 82 call (LEN221104C82) for a credit of $1.05 (selling a vertical)

This credit is $0.02 less than the mid-point price of the spread at Friday’s $77.07 close. Unless LEN sags quickly, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $103.70. This trade reduces your buying power by $300, making your net investment $196.30 per spread ($300 – $103.70). If LEN closes below $82 on Nov. 4, both options will expire worthless and your return on the spread would be 53% ($103.70/$196.30). 

September 20, 2022

Pumped Up

Much is made of gas prices declining for so many weeks in a row (I think we’re at 13 and counting). And that’s great for drivers. But what about the oil companies. Don’t they suffer when pump prices decline? Apparently not.

Gas prices peaked in mid-June and have dropped about 25% since then. But Chevron (CVX) has gained more than 5% during that period. For the year, CVX is up 33%. Its only major blip this year was the June swoon that pulled all stocks lower. But the decline was supported by the 200-day moving average, which allowed just a handful of daily closes below it in mid-July.

This trade is based on the strength of oil companies continuing for the next couple of months. More specifically, it is relying on the continued support of the 200-day. Note that the short put of our spread is right on the 200-day (blue line) and will be below it given the trendline’s current slope. Thus, CVX will have to penetrate that support to move the spread into the money.

If you agree that CVX will respect the 200-day, consider the following trade that relies on the stock staying above $148 (red line) through expiration in six weeks:

Buy to Open the CVX 28Oct 145 put (CVX221028P145)
Sell to Open the CVX 28Oct 148 put (CVX221028P148) for a credit of $0.75 (selling a vertical)

This credit is $0.05 less than the mid-point price of the spread at Friday’s $156.45 close. Unless CVX pops quickly, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $73.70. This trade reduces your buying power by $300, making your net investment $226.30 per spread ($300 – $73.70). If CVX closes above $148 on October 28, both options will expire worthless and your return on the spread would be 33% ($73.70/$226.30). 

September 12, 2022

September 12, 2022

Warp Speed for This Lithium Producer

Sociedad Quimica y Minera de Chile (SQM) producers highly sought after commodities, most notably lithium and potassium fertilizers. Though it missed on earnings in its August earnings report, it easily beat on sales. A couple of analysts raised their price target after the news, though the overall mood toward the stock is between a buy and a hold.

But what do analysts know? SQM is up 120% this year (not a typo) … and it pays a dividend of more than 11%. The stock has recovered what it lost following earnings and came within four cents of hitting an all-time high in Friday’s trading. Though it has traded mostly sideways for the past three months, the overall uptrend remains intact, as the stock continues to put in higher lows. Plus, its 20-day and 50-day moving averages are pointed higher.

This trade is a play on SQM’s continued strength as it sits in one of the most favorable sectors within the global economy – supplying EV battery makers. We are thus going with a put credit spread with the short put sitting below the 20-day moving average (blue line). 

If you agree that SQM will continue its uptrend, consider the following trade that relies on the stock staying above $100 (red line) through expiration in six weeks:

Buy to Open the SQM 21Oct 95 put (SQM221021P95)
Sell to Open the SQM 21Oct 100 put (SQM221021P100) for a credit of $1.10 (selling a vertical)

This credit is $0.02 less than the mid-point price of the spread at Friday’s $111.12 close. Unless SQM pops quickly, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $108.70. This trade reduces your buying power by $500, making your net investment $391.30 per spread ($500 – $108.70). If SQM closes above $100 on October 21, both options will expire worthless and your return on the spread would be 28% ($108.70/$391.30). 

Upcoming Market Dates:

Monday September 5th. Market closed for Labor Day
Monday October 10th. Market closed for Columbus Day

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