Selling To Buy
Love that picture!
Our trade, like a sheep, has 4 legs, but is not so wooly. We are selling a call spread and the premium thus received will buy a long put spread. The reasons for this trade are that margin is limited to the value of the short spread. The market seems to be teetering around the 7400-7550 level and may be in for a bit more reality. We are of course now in the July expiry cycle.
So- What’s the Deal?
We thus have… selling 7550call @ 39 buying 7600 call @24.5 Then……. buying 7300 put @ 38.5 selling 7200 put @25
The call spread thus sells for (39-24.5)= 14.5, and the put spread costs (38.5-25) = 13.5. Our nett cost is a tiny credit of 1.
How Does this Work?
The market can go up, down or stay where it is. In 2 of those scenarios we do not lose. Should the market go fruit loop and exceed 7550,we start to lose money,and may want to adjust. We make the big bucks though on a market drop where the value of the put spread can hit a maximum 100. The call spread goes worthless. Margin=1/2max profit(value of 50. The risk in the call spread sold)
I have been through the emotional spectrum with BAD trading. What we show here is trading with no risk of ruin. Thus, no need to get into psychology. No need to get philosophical. Nobody is philosophical in victory. The trading industry wants to fry you and then eat you for breakfast, therefore avoiding the pitfalls will save you. Pitfall avoidance is available right here for free.