Hi Advanced Traders!
Due to all the uncertainty and high IV, let's set up some more bear call spreads to generate some income.
If you had previous bear call spreads set up, hopefully you were able to close them this past week as the value of your legs most likely depreciated more than 50%.
AMD BCS:
I'm choosing the $115 strike as our second leg this week since the $110 level was recently rejected. I also think the probability of AMD rising to $115 is unlikely, as this would be more than a 20% increase in 45 days during a market full of uncertainty.
Expiration Date: July 22, 2022
Step 1: Buy 1 $145 strike call option (delta 0.02) for $12.
Step 2: Sell 1 $115 strike call option (delta 0.15) for $117.
Step 3: Set up a buy-stop order of 100 shares for $114 per share.
Credit: $117 - $12 = $105 per bear call spread
The goal is to have AMD stay below $125 from now until July 22. If it does, both legs will expire worthless and you will be able to keep $105.
If AMD rallies up to $115, you will buy 100 shares for $114 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.
I've noticed that some of you set up bear call spreads, observe the markets rally the next 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.
Again, let your couple hundreds or thousands of dollars worth of premiums stay as cash for now. We are building up capital to buy more shares and LEAPS options when the markets retrace.
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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