Apr 23, 20212 min
Updated: May 28, 2021
Hey everyone!
Because of AMD's pullback, I've been setting up some bear call spreads on this stock. Right now, AMD is trading at $79.61.
Here is what AMD's chart looks like:
I currently have a couple hundred shares of AMD where I purchased them for around $90 and I've been consistently selling covered calls against my shares at the $90 strike. Because of the drop in price, the premiums I've been collecting from my covered calls are much smaller than what I was collecting before. Because of this, I am setting up some bear call spreads on top of my covered call trades to generate additional income. You can follow my recommendation if you feel comfortable.
So here's the game plan:
Step 1: Buy one May 21, 2021 call option at the $105 strike for $24 (Delta 0.05)
Step 2: Sell one May 21, 2021 call option at the $90 strike for $104 (Delta 0.19)
Step 3: Set a buy stop order for 100 shares at $89.
Profit: $104 - $24 = $80 per contract
Here's a picture of the option chain below:
My goal for this trade is to have AMD hover at the current levels. If AMD drops, that's good for me because both my legs will expire worthless and I get to keep all the premium. If AMD rises, that's also good for me because AMD will get closer to my originally purchased $90 price, so I can sell calls at a higher price or even get my shares called away.
I recommend setting up bear call spreads on a 1:1 ratio to your covered calls on AMD. For example, if you have 5 Wheels on AMD, you can set up 5 bear call spreads. This way, not only are you collecting premium from your covered calls on AMD, you are also collecting premium from the bear call spreads.
If you are brand new to setting up bear call spreads, you can consider just setting up one first to observe how the price of your spread fluctuates.
On another note, since we are heading into earnings, many of these premiums are inflated due to high IV. Once earnings are released, you will see volatility crush happen across all option premiums, which is good for us options sellers. If you see a dramatic drop in price in your bear call spread, you can choose to close your position early to lock in your profits.
Happy trading and investing! 😎
-Steve and the Call to Leap Team
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