Trade The Journey

Trade The Journey

Profit: Almost Doesn’t Count.

Learning about options and option spreads can be intense. So I always remember to take short breaks to give my brain some rest. The complexity of options never ceases to surprise me.

Once you have the basic of options down you are able to move to more complex trades. Although there are two types of options, a call and a put, there are many ways to arrange them. Advanced option traders are able to create strategic spreads.

Keep in mind that the risk and rewards change as you add a option leg. An option leg is another way of saying adding another option (Call or Put). Learning how to combine options to minimize your risk is the essence of using leverage.

I entered a trade the day before the closing day of a bearish call option spread. My first mistake was thinking I could cheat the market. I brought one call option slightly out of the money and sold one call option at the money. Buying a call is a bullish trade. Selling a call is a bearish to neutral trade.

Selling the call at the money means that I thought that the underlying stock would not move above the price. I brought a call option to limit my risk. My risk was limited to the spread between the two call options minus the premium I received.

AMC’s stock is a low volatility stock which means it didn’t make large movements. I thought by getting into the trade the day before, I’d be able to capitalize on the spread. I’d keep the premium.

At first, I thought I had made a profit. The stock did not move much. Once my account statement came from the previous month, I saw that I lost money. I lost the entire premium.

What I didn’t consider when opening the position was how to close the position. Closing at the right time is a big part of a winning trade. I brought back the spread at the wrong time which erased my profit.

Results: Brought the call and sold the call with the same breakeven of $13.95. The brought call rose to $14.35 and the sold call fell to $13.30. The strike price for the brought call was $12.50 and $12.00 for the sold call. Total loss of 0.25 x 100 = Around $25. This is what I brought the option spread back for. A loss.

Suggestions? Corrections? Ideas?

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