Profiting in Any Type of Market----Call options

07/10/2015 08:14

In this short article we concentrate on strategies that really help us raise the profit potential and help safeguard profits for ETF and ETF option purchases. In today's quick markets you will need to protect profits for profitable ETF and ETF option purchases:

1) Take profits on a part of your profitable ETF or ETF option positions.

2) Sell a possibility to create a spread on profitable ETF or ETF option positions

We covered taking partial profits on profitable ETF and ETF option positions in Chapter 2 - Trade Management Guidelines. Details about call options. Now let's explore selling options to create spreads on profitable ETF and ETF option positions. Selling options to generate spreads not just helps protect profits but contains the added advantage of increasing the gain potential of existing trades. Let's have a look at an actual trade example to help us appreciate this important concept.

In 2006 the China ETF what food was in a GPS Major Trend System price up trend. My brokerage confirmation below implies that in December 2006 I purchased 10 with the China ETF (FXI) January 90-Strike call options symbol YOFAW in increments with an average expense of 17.44. These options expire in 13 months. I then sold 10 with the China ETF (FXI) January 120-Strike call options symbol YOFAD at 8.00 points on May 11th. The sale of the 120-Strike call options made a bullish option spread that enhances the profit potential with the 90-Strike call options purchase plus provides problem protection in case the China ETF increases in price. Although this can be a longer term trade this spread can be closed in the market to take profits anytime before option expiration. As noted previously I normally will take profits on the spread trade when the spread reaches about 90% of the maximum profit potential.

The Spread Analysis below displays the gain potential for buying the China ETF January 90-Strike call selection for 17.44 points and selling the January 120-Strike demand 8.0 points. Relevant Info about options trading. The Analysis displays potential profit most current listings for various price changes to the China ETF at option expiration from a 10% increase to your 10% decline in price. The China ETF was trading at 115.90 if the spread was created. The price of this spread is 9.44 points or $944 and is also calculated by subtracting the 8.0 points I received through the sale from the 120-Strike call from the 17.44 cost in the 90-Strike call purchase. The maximum risk about this trade is the price of $944.

The Spread Analysis reveals that if the China ETF price remains flat at 115.90 at option expiration a 174% return will likely be realized (circled). A 10% boost in price to the China ETF to 127.49 makes a 217.8% return as well as a 10% rise in price to 104.31 makes a 51.6% return (circled). The maximum profit potential of 217.8% for this spread is reached if the China ETF closes at or above 120 at option expiration which may be the strike price from the short call.

I purchased the China ETF 90-Strike get in touch with December. The price from the underlying China Fund ETF continued to go up in price following your purchase through May 11th the 90-Strike call purchase had a 9.70 point open trade profit when I sold the 120-Strike call to produce the spread.

When I sold the 120-Strike call the China ETF was trading at 115.90. The 120-Strike call, therefore, was an out-of-the-money call since the strike price was greater than the current price from the ETF. Out-of-the-money calls include only time value and no intrinsic value. When you sell an out-of-the-money call the total value with the premium in this example 8.00 points becomes all profit at option expiration as options lose in history value at expiration. So the sale of the 120-Strike out-of-the-money call increases the profit potential in the 90-Strike call purchase by 8.00 points regardless in the subsequent price movement of the China ETF.

Increased Profit Potential by 82% and Reduced Risk

On May 11th the existing 90-Strike call purchase a 9.70 point open trade profit so the sale from the 120-Strike call increased the gain potential from the call purchase by 82% (8.00 points/9.70 points = 82%). In addition towards the increased profit potential the sale of the 10-Strike call also reduced risk by providing downside protection for your 90-Strike call purchase in case the price from the China ETF declined. Creating spreads with the existing option purchases increases the profit potential and reduces the risk of the option purchase. This provides one with the best overall risk/reward profiles when compared with any other strategy.

Note: In it we used a bullish option spread. The same advantages of creating a bullish option spread would also connect with bearish options spreads.