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Wednesday, March 21, 2012

Spread Mania

OMG, I know I must sound like a crazy woman, but learning how to do spreads (and I don't mean just learning "how" to recognize or set them up, but learning what they are, how each leg can be used to adjust other trades -- is just a miracle for me!

As an example. I had a really, really good run with straight Calls on last week's
Apple rally. I made a LOT of money in two days as it worked its way up to $600. I just bought and sold calls like a maniac. My fund isn't big enough to "day trade"
so I just put trailing stops on them, and when the stock dipped 5% or more (which it did from time to time) my call would sell, and I'd turn around and buy another one.
Apparently this doesn't count as day trading because it stopped out??

Anyway, the rally couldn't go on forever, so I was stuck with one call, way OTM (Jun $650) which then plummeted into the red as Apple reversed.

With this Option Animal training I'm getting (and I still love it!) I thought: well,
how can I adjust this call and make some money? It is a June call, so I have lots of time. What I decided to do is use it as if it was stock, and write synthetic covered calls against it.

BTO Jun $650 Long Call (which is going into loss)
STO Apr $640 Short Call (to offset expense of long call)

So I sold an Apr $640 Call, turning the trade into a Call Calendar or a synthetic Covered Call. It doesn't matter what I call it. The point is: I paid $2300 for the call with a June expiration, and I sold the April call for $935. That reduces my long call considerably. If Apple doesn't rally again, I shall then sell the May and then the June call, and hopefully that premium will cover my expense for the one last option trade in Apple that didn't come through with huge profits.

Without my new found knowledge of spreads, I would never have figured this out. I have a LOT more to learn, but at least what I am learning is helping me to keep my money and increase my profits.

Happy Trading!



  1. I'm playing w/covered calls while I learn spreads better. But I don't understand this "synthetic" covered call.
    So you BTO Jun 650 Call - which gives you the right to buy at 650.
    Then you STO Apr 640 Call - which gives you an obligation to sell at 640.
    If the stock rallied above 640, and your short Call was exercised, wouldn't you have to buy the stock at current price (let's say 645), just to sell it at a lose of 640?

  2. The idea of synthetic covered calls is to save money on purchasing stock (the long call is cheaper) and to keep selling
    calls against the long one for income. You do NOT have to let the shorts go to expiration, or into the money, or be assigned,
    and you'll either roll them for more credit, or close them out and sell a new one (in the event that the stock goes against
    you). (You can also roll the long, when the time comes to keep the trade going).