Hey Advanced Traders!
Because of the uncertainty from the Federal Reserve and Omicron Variant, we are planning on setting up some bear call spreads. I recommend setting up bear call spreads on stocks that you already have Wheels on, so you can cycle through your multiple of 100 shares if the stock price hits the second leg of your spread.
For example, if your initial cost basis for your AMD shares was $150, you can set up a bear call spread with your second leg above $150. You can choose a strike for your second leg close to AMD's ATHs, which is around $160. Keep in mind that AMD is a more volatile stock.
For another example, if your initial cost basis for your NKE shares was $175, you can set up a bear call spread with your second leg above $175. You can choose a strike for your second leg close to NKE's ATHs, which is around $180.
AMD
Expiration Date: December 23, 2021
Step 1: Buy 1 $220 strike call with a Delta 0.03 for $35
Step 2: Sell 1 $180 strike call with a Delta 0.32 for $345
Step 3: Set up a buy stop order of 100 shares at $179
Profit/Credit Received: $345 - $35 = $310
NKE
Expiration Date: December 23, 2021
Step 1: Buy 1 $195 strike call with a Delta 0.03 for $23
Step 2: Sell 1 $160 strike call with a Delta 0.22 for $224
Step 3: Set up a buy stop order of 100 shares at $159
Profit/Credit Received: $224 - $23 = $201
What's the Goal?
Since you are pairing a bear call spread to a Wheel, your goal is to have your underlying stock trend neutrally. If it does, you are able to collect the total premium from both your Wheel and bear call spread. If the stock rises up towards the second leg of your spread, the shares from your Wheel will most likely be called away and you will pick up more shares at a slightly higher price. This strategy is to keep you from having too many shares at once, so you don't tap too much into your margin.
Closing Positions Early
Can you close your bear call spread position early? Of course! If you see that the underlying stock drops, which causes the legs of your spread to also drop, you can close your position to lock in profits. I typically like to lock in profits if I'm able to capture anywhere from 50-80% of the premium.
Tweaking Your Numbers To Your Risk Tolerance
As always, feel free to tweak the numbers to your liking. If you don't want to have a higher probability of getting assigned the shares from your spread, you can consider choosing 1-2 strikes higher for a lower premium. On the contrary, if you don't mind the higher probability of getting assigned the shares, you can choose 1-2 strikes lower for a higher premium.
Happy trading everyone! 😀
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.