Aug 21, 20213 min
Hey Advanced Traders!
Let's talk about some calendar spreads and bear call spreads this week!
V:
Before reading on, make sure you watch the PMCC video in the Level 3 series. You will also need to understand the basics of Greeks and setting up BCS. 👌
As you can see, Visa broke its upward trending support line and the stock has been pulling back for a couple of days. If you entered a V LEAPS option when it was around $240, you can consider setting up a calendar spread/PMCC to generate more premium.
Very similar to a covered call where you have to (1) purchase 100 shares and (2) sell a call against the shares, you can do the same thing with your LEAPS option and convert it into a calendar spread/PMCC by selling a call against your LEAPS option.
Assuming you have 1 LEAPS option, you can sell a front-month call against it. I would choose to sell the following call against it:
Expiration Date: September 17, 2021
Strike: $245
Delta: 0.15
Premium: $91
When you sell a front-month call against your previously owned LEAPS option, you are essentially lowering the cost basis of your LEAPS. In this scenario, you would lower your cost basis by $91.
If by expiration, Visa stays below $245, your front-month call will expire worthless and you will get to keep the entire $91 premium.
If by expiration, Visa goes up above $245, you will need to cover yourself. I would recommend setting up a buy stop order of 100 shares at $244. If Visa starts to trend upwards to $245, your brokerage will automatically purchase 100 shares of Visa at $244 and you can then combine your new 100 shares and front-month call into a covered call trade. You can also sell your LEAPS option for a profit.
Again, remember that if you set up a calendar spread/PMCC, you will need to cover yourself in case the price of the stock goes up above your strike. This means that you will need to have the capital to do so, either with cash or margin.
AMD
Looking at the technicals of AMD, it looks like the stock kissed a high of $120 and pulled back to its current $104.65 level. If you are bearish on AMD for the short-term, you can consider setting up a bear call spread.
Here are the details I would choose for this trade:
Expiration Date: September 17, 2021
Step 1: Purchase 1 $150 strike call with a delta 0.02 for $0.09
Step 2: Sell 1 $120 strike call with a delta 0.15 for $96
Step 3: Set a buy stop order of 100 shares at $119
Profit/Credit Received: $96 - 9 = $87
The goal is for AMD to trend neutrally or even a little downward from now until the expiration date.
If by expiration, AMD stays below $120, your both call options will expire worthless and you will get to keep the entire $87 credit.
If by expiration, AMD goes above $120, you will purchase 100 shares of AMD at $119 and convert the trade into a covered call. You can then sell your first $150 strike call leg.
Okay gang! If you have any questions, feel free to let us know!
Have a wonderful weekend! 😎
Steve and the Call to Leap Team
The following article is strictly the opinion of the author and is to not be considered financial/investment advice. Call to Leap LLC and the author of this article does not claim to be a registered financial advisor (RIA) or financial advisor. Please visit our terms of service and privacy policy before reading this article.