Jun 17, 20223 min
Updated: Aug 2, 2022
Hi Advanced Traders!
Hopefully you were all able to close your AMD BCS positions this past week to lock in your gains. Again, just let your profits sit as cash right now and we can reallocate our capital into long-term holds and LEAPS when we observe an upward trend reversal.
AMD BCS:
If you are going to set up bear call spreads, it's important to look at the technical charts and statistics. Here are some guidelines to be mindful of:
Make sure your second leg is above the downward trending channel's resistance line. Setting your second leg too close or inside the channel may result in your second leg becoming ITM.
For volatile stocks like AMD, I prefer choosing the strike of the second leg to be around $15-20 above the current market price. For example, if AMD is currently $85, I would choose a strike between $100-105.
Lastly, I prefer choosing around a delta 0.16-0.20 for the second leg. You can consider choosing a higher delta for larger premiums, but I would not recommend choosing any deltas higher than a 0.30 as your second leg will have a higher probability of being challenged.
Here is the AMD BCS trade:
Expiration Date: July 29, 2022
Step 1: Buy 1 $125 strike call option (delta 0.02) for $14.
Step 2: Sell 1 $100 strike call option (delta 0.17) for $121.
Step 3: Set up a buy-stop order of 100 shares for $99 per share.
Credit: $121 - $14 = $107 per bear call spread
The goal is to have AMD stay below $100 from now until July 29. If it does, both legs will expire worthless and you will be able to keep $107.
If AMD rallies up to $100, you will buy 100 shares for $99 each, convert your bear call spread into a covered call, and sell your first leg.
By setting up bear call spreads, you are essentially willing to convert your trade into a covered call. You don't initially have to own the 100 shares in the beginning. However, if the stock rallies, you will want to have the capital ready to cover yourself.
Remember that you don't necessarily have to wait until expiration to end the trade. You can always lock in your profits if your contracts shrink 50-80% in value. This is what majority of professional traders do.
Like I mentioned last week, I noticed that some of you set up bear call spreads, observe the markets rally 1-2 days, and start to panic. Remember that we want to let the statistics play out and that there is a lot of time from now until expiration for quick drops in the underlying and theta decay to do its job.
For those of you who have been setting up bear call spreads over the past 6 months, you most likely see how powerful this trade is since we just need the stock to not really go anywhere in a short amount of time.
I also want to mention that there will be days where we will have volatile relief rallies. If you plan to set up 20 bear call spreads, you can consider setting up 10 now, and another 10 after a relief rally. Like what I always say, "when in doubt, split it out."
Like always, you can use these numbers as a guide and feel free to tweak the numbers to your own preference and risk-tolerance.
Happy trading!😀
Steve and the Call to Leap Team
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