Hi Advanced Traders!
With the news that came out this week that spooked the markets, you can consider setting up some bear call spreads. Again, remember that by setting up bear call spreads, you are willing to purchase shares to cover yourself in case the underlying stock rises up.
AMD Bear Call Spreads
Looking at the recent highs of AMD, we see that the stock had some difficulty passing the $104 level. Because of this, I'm planning on selling my second leg at either the $105 or $106 strike.
Expiration Date: September 30, 2022
Step 1: Buy 1 $125 strike call option (delta 0.02) for $13.
Step 2: Sell 1 $105 strike call option (delta 0.19) for $130.
Step 3: Set up a buy stop order for 100 shares for $104 to cover
Credit received: $130 - $13 = $117 per spread
AAPL Bear Call Spread
The last high that AAPL reached was the $176 level. I'm planning on selling my second leg at either the $177.5 or $180 strike.
Expiration Date: September 30, 2022
Step 1: Buy 1 $195 strike call option (delta 0.02) for $11.
Step 2: Sell 1 $177.5 strike call option (delta 0.16) for $102.
Step 3: Set up a buy stop order for 100 shares for $176.5 to cover
Credit received: $102 - $11 = $91 per spread
You can consider pairing bear call spreads with your covered calls. For example, if you have 3 covered call trades on AAPL, you can open up 3 bear call spreads. You would essentially have 6 sold calls with 300 shares and 3 bought calls as collateral.
It would be ideal to set the second leg of your bear call spreads higher than the strikes of your covered calls. For example, if you have an AAPL covered call with a $170 strike price, you can set up a bear call spread with your second leg at the $175 strike.
By doing this, you would be able to let both of your contracts decay to $0 if AAPL stays below $170.
If AAPL rallies past $175, you would let go of your 100 shares of AAPL at $170 per share and cycle into a new round of 100 shares at $174 each because of your buy stop order.
I know that was a lot to digest, but take your time studying this over the weekend. Feel free to ask us questions in the Dashboard as well.
All in all, make sure to see if these trades fit your own risk tolerance. You can also tweak some of the numbers around so you feel more comfortable. And of course, you can always practice these trades in a paper trading account to understand the numbers better.
Ah, and one last thing; please don't get too greedy. Many of you made thousands of dollars during the downward market in the first half of the year. However, some of you had too many spreads open and weren't able to cover yourselves when we had a reversal back up.
Remember that the markets will eventually go back higher in the long run, so it's important that you prepare yourself when this happens.
Trade responsibly and stay patient!
-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.
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