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Posted by Martin December 10, 2014
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Defending Iron Condor


The good news is, that with Iron Condor you can be wrong only once, not on both sides. But when one or the other leg goes bad what would you do to defend your position?

Defending Iron Condor is the same as defending any credit spread, be it put or call spread.

I opened an Iron Condor against SPX 2105/2110/2045/2040 last week and collected $70 premium. I could see the stock market being weak so I skewed my trade towards downtrend and opened it with more room to the downside.

It didn’t help much as on Monday the stocks got hit hard thanks to energy stocks. It was in the morning when I didn’t know that SPX would recover by the end of the day.

So I decided to roll the put side. I chose to keep expiration day the same, but lowered the strikes.

I rolled my put side from 2045/2040 to lower 2035/2030 strikes. To collect credit I had to buy back my one contract and sell two new contracts increasing my risk. I rolled the trade and collected additional $30 premium.

Why I did it? I hoped that by lowering the strikes the trade could still stay safe and still expire worthless for a full profit. Therefore I accepted a higher risk for the remaining three days of this trade.

Yesterday and today the SPX continued in a sharp decline. Surprisingly, on Tuesday the market recovered all day losses, but today SPX reclaimed them and fell even lower attacking my new 2035 strike.

What to do in such situation?

There are only a few options since the trade is so close to expiration:
 

  1. Close it and take the loss
  2. Roll it further away in time but same strikes for credit
  3. Roll it further away in time and try to lower strikes, but only if you get a credit, or small (really small) debit

 

I am not going for a loss! That is not an option for me. So what can I do here?

I will try to roll it away in time and lower the strikes. If I won’t be able to roll it away and lower the strikes, then I will roll it in time only.

By rolling it I am “buying” more time for the market to recover back above the current strikes allowing it to expire worthless for a profit. That means that I am still bullish on SPX and that the market would go up.

If I am wrong and this is a beginning of a deep market decline, then I would have to take a loss and close the trade. However, I do not think that we are in such bad shape that markets would slump deep down and stay there.

Then the question is, how far away and when to roll? How much time would this market need to recover potential losses?

The last decline lasted almost a whole month. If we are about to see the same decline this time again, I would need at least a month to recover.

Thus I tend to roll into the next month expiration, which would be January 9th and give the market a whole month. After that we will see what would happen next.

When to roll? If the market continues down in a frenzy sell off, then there may be nothing to be done and the roll may be out of question. It would be better to close the trade. I will wait until Friday and see where the market will be to decide whether to roll or close for a loss.

Happy Trading!
 
 




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Posted by Martin December 06, 2014
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How to create bullish option spread?


Jerry, my newsletter subscriber, asked me the following question: I like (The Walt Disney Company) DIS long term, say out to 2016. How do I set up a bull spread on it?”

I liked his idea and the company, so I decided to post my answer how I would set up a bullish spread against this company and make money. The Disney Company pays dividends (1.20% yield) and if you do not have enough money invested in this company, spreads can help you to receive even more money for less, which you can invest back into this company and buy more shares.

And you can do it with even less risk than owning the stock!

So how do you create a spread?

It depends on your outlook and what you expect from DIS over time. First, you need to find out what spread you want – debit spread or credit spread?

How to create a debit spread?

If you want to go with a debit spread, for such a long outlook or time span of the trade we need to estimate where the stock can get by, let’s say, January 2016. If we project the trend until 2016 we can see that the stock may reach a level around $110 if it continues in the current trend and growth. See picture bellow:

Disney (DIS)

Click on the picture above to enlarge it

However, we want to be slightly conservative and select trend slope not that steep. We would go with a median growth and then our target price would be around $100. We would construct the debit spread around this price:

BTO 1 DIS Jan 16 100 call
STO 1 DIS Jan 16 105 call
 
@ 1.53 LIMIT GTC (debit)
 
Max gain: $347.00 (226.80%)
Max loss: $153.00
Margin: $162

Then you have to wait for the stock to get to your target. The stock must end above $105 in order to gain full profit. This trade starts to be profitable when the stock moves above $93.86 per share if closed prior to expiration and if it gets above 101.54 or higher at expiration.

How to create a credit spread?

If however you want a credit spread (receive money now) then you would have to open bull put spread:

BTO 1 DIS Jan 16 100 put
STO 1 DIS Jan 16 105 put
 
@ 3.45 LIMIT GTC (credit)
 
Max gain: 345.00 (222.58%)
Max loss: $155.00
Margin: $164.50

The stock must grow up above $105 to make full profit. The only risk I see here is that we will be selling ITM (in the money) options and since these are American style options there is a risk of early assignment (unlikely) which can ruin the trade. For this reason I would prefer a debit trade.

I think this is not a bad trade idea and I may open one myself. I like shorter trades however, so I will be looking for a shorter expiration term than January 2016.

Hope this helped you to understand how I create spreads or trades. If you have any question, you can always contact me.

And if you want to see what trades I am about to open every week, subscribe to my options alert newsletter. It is free until the end of 2017 and you can follow the trades I post or mirror them in your own account.

Happy Trading and good luck.
 
 




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Posted by Martin December 04, 2014
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Friday expiration tomorrow may bring nice profits


ProfitsAm I getting it right already? I do not know. For almost three years I was profitable trading options and suddenly a backlash of last three months erased all my previous gains. I tried hard to stop bleeding but all trades were turning against me, one after another.

That’s frustrating and I was desperate to stop losses. When I thought I finally found a way how to limit my losses I got hit with another unsuccessful trade which ruined my P/L again.

What to do when you get hit with a strake of losses? What worked for me was to stop trading.

Yes, stop trading and go away.

So I sold all unprofitable positions and waited. I only opened one trade – Iron Condor against SPX, which was very conservative and setting a trade in such manner paid off so far. But market was calm so it worked. What if it was violent and the price breached one or the other way and again breached my spreads?

I do not want to think the consequences of such outcome. It would be another losses piling up.

I know of one mistake I still keep doing – hoping for a trade to reverse, so I favor rolling it hoping for next week better outcome. Many times such trade finished even worse.

It looks like this is a dead end route and killing losing trades faster is a lot better way of trading. But many times cutting losing trades is worse than rolling. When I roll a spread or option away in time and strikes, many times I get credit. On the other hand I increase my risk.

When closing such trade, it is more expensive than the credit received. Let’s say I have an Iron Condor for which I received a credit of $40, but if the trade goes against me I have to close for $100 loss. True, it is better than let the Condor end with a full loss of $470-ish loss, but still, I hate taking a loss.

There is a strategy for this case – close the trade when all your credit is lost – 100% of received credit, for example, you receive $40 credit and when you close the trade because it goes against you, you pay 40 dollars to close it, not more.

I tried this but it never worked well for me. If I closed as described above, it was always too early.

For example, I had a bull call spread against SPX and when the markets started showing weakness a few days ago and the trade started showing a loss of approx. 200 dollars (a half of the entire loss) I decided to close the trade. If I held however, the trade recovered and I could close for a partial profit instead of a partial loss.

I have heard that it is a good strategy anyway. It is better to take a small loss no matter what happen later than hope for a recovery which may not come. In my example it did come, but it could have a totally opposite outcome and the position could get worse.

It is this balance between cutting losses or give a trade more time to work. Which is better?

Time will show. Hopefully in the meantime I will stay afloat.

Expiration Friday

Tomorrow is expiration Friday when all weekly options are set to expire. I have a few trades out there which are set to end tomorrow (I wouldn’t call them expire as they will not expire but get exercised).

I have an Iron Condor against SPX 2115/2120/2035/2030 which will expire worthless for a full profit of received credit tomorrow if the market stays between 2035 and 2115 price. This is very likely to happen. The market would have to drop more than $35 in a day in order to this to happen. The expected move for tomorrow is only around $13, so unless a disaster occurs I can claim that this trade ends up profitable. I collected 0.40 premium per contract which will be an 8.70% profit in a week.

The next trade I have is a bear put spread against CVX. I opened this trade yesterday. It was a debit spread CVX 115/114 puts. I paid $270 debit to open this trade. If the stock ends up below $114 tomorrow by the end of the trading session, both legs of the spread will end in the money. Then they will be exercised against each other (the short option will offset the long option) and the trade will end up with a $230 profit (85.19% profit in three days). Today the stock continued falling and closed at $112.28 a share. If tomorrow it continues falling or stays where it is (must stay below $114), this trade will be profitable.

The last trade for this week is a bear put spread against CLF. I also opened this trade yesterday and it is a debit spread too. I opened 8.5/8 put spread and paid $280 debit. Now the stock must close below $8.00 a share tomorrow in order to collect a full profit. Today the stock dropped down but it wasn’t as smooth sell off as I could see with the CVX. Thus I am expecting some resilience in selling tomorrow. Should the stock grow tomorrow, I will close the spread for a partial profit. A full profit was $220 (78.57%) for the entire trade. As of now the trade shows $125 (44.64%) profit in three dyas. Tomorrow, we will see how this trade ends up.

These are all the trades I will deal with tomorrow. I have a few more trades open against CMCSA and AAPL, but these have expiration next week. That would determine my trading for that week. To keep my trades small, I will only open a new trade against SPX (possibly an Iron Condor) and one more debit spreads next week (in lieu of three spreads). It will all be determined by the outcome of tomorrow’s trading.

If you want to be informed about those trades I am about to open tomorrow and next week, you need to sign up to my newsletter as I announce those trades via newsletter only. It is free and it will stay free until the end of 2017. Then I will start charging a fee.

Good luck next week and happy trading!

 
 




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Posted by Martin November 28, 2014
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Expiration Friday mostly flat

Expiration Friday mostly flat

The week looked good until last Thursday end of the trading. Markets were slightly up which was good for our options positions set to end this Friday.

I had an Iron Condor against SPX set to expire today. It was 2105/2110 calls and 2030/2035 puts. Since the market ended at $2067.56, both legs of the Condor ended out of the money and expired worthless for a full profit.

When I was opening the trade I collected $40 premium per contract. This represented a gain of 8.70% in a week.

My second trade was a bull call spread or debit spread against SPX. I had 2065/2070 call spread and my risk was $290 to make $210. Not bad if the trade could end profitable.

On Thursday the stock market was well above 2070 making this trade a great deal. Even today morning the stock market went up above 2075 a share. But then it reversed and continue falling heavily pushed down by energy stocks.

If the market ended above 2070, both calls would end up in the money and could be exercised against each other for a full $210 (76.36%) profit. Unfortunately, it didn’t happen. The market fell hard and I had to decide what to do with this trade. I had an option to either close the trade for a partial profit, let it expire and offset both calls against each other for partial profit, or roll it.

Since the market continued falling hard and my lower long call option (2065 strike) became also endangered I decided to roll the trade. If I closed it, the profit could be very little or I could be closing with a loss. Rolling the trade increased my risk, but also increased a chance that this trade ends up in the money and I will profit.

So I rolled my debit spread 2065/2070 further away in time (into December 12, 2014 expiration) and hope the market will continue higher by then.

But what if the market won’t continue higher in the next two weeks?

Then I have a plan to close my short call position (2070 strike) and sell 2060 strike converting my debit call spread into a credit call spread. That will turn my bullish trade into a bearish trade and hopefully also expire worthless. We will see next week.

Happy Thanksgiving Trading Day!




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Posted by Martin November 26, 2014
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Happy Thanksgiving Day

Happy Thanksgiving Day

Dear readers, subscribers, traders, and investors,

It has been a rough year and I believe for many of you a profitable year. The end of this year wasn’t as good to me as I would wish, yet I am grateful for it as I learned a lot from my mistakes. I hope I would be able to use this knowledge and be a better option trader.

I also hope that my blog and my newsletters about options trading would be also valuable for you, my readers and traders and it will bring you good trading and investing ideas.

I am also thankful for you my readers for visiting my blog and being subscribers to my newsletter.

Thank you!

I wish you successful trading, investing, and fulfilling your goals in the next season.

Martin




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Posted by Martin November 17, 2014
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What’s stalling the Wall Street rally?


With U.S. stocks nearly 2 percent overvalued, investors are worried that markets will see another correction, says Hugh Jackson, Chairman of Hugh Johnson Advisors.




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Posted by Martin November 16, 2014
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Last Friday expiration of Netflix (NFLX) Iron Condor for 19.51% profit

Last Friday expiration of Netflix (NFLX) Iron Condor for 19.51% profit

On November 10 2014 I opened an Iron Condor trade against Netflix (NFLX). I opened a call side at 405/407.50 and a put side at 365/363.5 shifted a bit towards bullish trend – meaning that I set the call wing of a Condor higher to protect the trade against stock’s uptrend which I have expected. This made the put side higher too, but as I said, I expected a steady uptrend rather than downtrend.

At the end, the whole week the stock moved completely sideways, an ideal move for Iron Condor. See the chart below:

Netflix (NFLX) expiration

Ideal move for Iron Condor and the stock price stayed safely between my two short options of 365 and 405 strikes. The entire trade looked like this:

BTO 2 NFLX Nov2 14 407.5 call
STO 2 NFLX Nov2 14 405 call
 
In order to trade this Iron Condor, the price must have stayed in between these two legs which it did!
 
STO 2 NFLX Nov2 14 365 put
BTO 2 NFLX Nov2 14 362.5 put
 
@ 0.40 LIMIT DAY

This Friday, our Iron Condor expired worthless and we kept a profit of $80 premium or 19.51% in one week!

Will we be opening a new trade against Netflix to take advantage of its sideways trading? Probably not as we can see a squeeze and Bollinger Bands are getting narrow again, which is a sign of “something is cooking under the hood” event. The stock may shoot up or down rapidly now and we do not want to be on the wrong side. So we need to wait for a sign which direction the stock would move before we engage our money. There are signs of an uptrend move, but we need confirmation.

If you want to be informed about such trade at the same time we take this trade ourselves, you need to subscribe to our free newsletter.

Happy trading!
 
 




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Posted by Martin November 15, 2014
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October 2014 investing and trading results


My GoalOctober 2014 was a consolidation month for me and I am finally back on track making money trading options. Nevertheless this year 2014 would be a bad year for me, but that is a part of the entire game.

If you want to trade with your money, you can make great returns. Yes, you can make 100% or 500% or even 1000% return. But such returns have a great risk involved. You must be willing to accept it and you must learn how to tame it. If you do not know what you are doing and how to manage risk do not trade otherwise you lose money.

Some time ago I decided to take that risk. It fulfils my dream and makes me happy trading options. Although it is sometimes frustrating, over all I am like a fish in the water. And I can see a huge potential of trading options and making a lot more money than I have ever dreamed of.

The only thing I need to do, besides learning how to trade options successfully, is have rules and patiently follow them.

The reason I lost money in September was that I broke my rules and was greedy. I had a hard time to take smaller profit. I could make $15,000 in a small account, but I was greedy to take only $8,000 even though I knew the trade was extremely risky. Instead of a sure $8,000 gain I ended up with a huge loss.

Time to change it.

Below are the results of my investing and trading. This time I would like to add my other accounts, although not detailed.

Dividend Growth Investing

Investing into dividend stocks is a security to me. Many times I repeated that I trade options and take gains and invest them into dividend growth stocks. I know traders who do something similar. For example John Carter, an option trader with 30 years of experience in trading options and an owner of Smpleroptions.com has a rule to take profits up to 50% and invest in properties. He buys land in Texas.

John buys land, I buy dividend stocks.

TD Account

I primarily trade options in this account, then take proceeds and buy dividend stocks. However, this time I didn’t purchase any of the dividend stocks in this account. My only recent purchase was Alibaba (BABA) which is now 34.16% up. This is not a dividend stock but my growth stock play. I do not have a plan for this stock and thinking to use stop loss to get out of the stock. Not sure if I want to hold it as a long term investment.

What would you with an investment you consider an exception to your strategy and you took it as a “play”? Would you hold it, or sell it after you reach gains and then reinvest proceeds to your primary investment vehicles (in this case dividend stocks)?

For detailed results of this account, see below.

ROTH IRA

This account is a pure dividend growth account. It’s current Net-Liq (net liquidation) value is $17,225.23 up 6.13% from previous month. I only reinvest dividends at this point. I plan to add a full allowed investment at the end of the year from a bonus if I get any.

I reinvest dividends by investing them into a non-transaction fee ETF (RWX). Since I pay no commission to buy this ETF I can invest as little as 1 share. With this approach I could save money in this fund and once I safe enough, I sell a portion of the fund to release money for my next dividend stock purchase.

For example my goal is to save $1,200 in this ETF. Once I reach this goal, I sell shares to release $1,000 and then take that money and buy a dividend growth stock, while I continue saving the new goal. And of course, while waiting I collect dividends from this fund.

As of this writing, I saved $1,112.80 and collected $16.29 (1.46%) in dividends from this fund while waiting (since February 2014). Not bad. Try to put this money into a savings account and hold them there for 10 months and compare the results.

Now I have to wait 30 days to sell the shares from RWX to release $1000. It is a part of the rule to keep all transactions commission free. After 30 days, I will be purchasing a dividend growth stocks.

In this account I received $149.34 dividends this month.

Motif Investing

My Motif account is a great way how to create a mutual fund. It works similar to 401k plans. The account allows you to invest into fractions of the stocks, so you can create a portfolio of your best stocks and start accumulating in it.

I created a few portfolios myself. I have a monthly dividend paying stocks portfolio and regular dividend growth stocks portfolio. Once you create those portfolios you can start buying them all as one piece and you will be buying fractions of the stocks. Great way to stay diversified with 30 or 60 stocks which you wouldn’t be able to purchase all in a regular account.

If you are small or starting investing, Motif is a great wealth builder. And what’s more, if you start investing now, you will get rewarded many times and you will support this blog too. You can get up to $150 when you start trading at Motif Investing! What a great deal!

My current Net-Liq value is $1,333.27, down -1.07% from the last month and I collected $6.31 (0.47%) dividends.

Scottrade

This is my compounding experiment account. I use this strategy since I do not have any. I do not add money to the account as of now. At some point I purchased (PSEC) and I use FRIP program to accumulate this account and stock. I started with 700 dollars and in 2018 I should have $4,631.82 and collecting $386.04 monthly dividends (of course if nothing bad happens with the stock.

401k account

There is nothing much to say about my 401k account. I continue saving 6%, my employer matches up to 3% and the account has a steady growing trend. Today there is $50,757.68, up 5.87% from previous month.

Options Trading

I only trade options in my TD account. As I mentioned above, this month was a consolidation month and I hope November 2014 will show profits again. During October 2014 I got rid of some risky trades (and realized loss) and also changed my strategy a bit shifting into weekly options trading.

I give away my options trade via a newsletter, so if you want you can follow them or copy them in your own account. You can follow my trades at My Trades & Income page. But if you want to receive a trade alert in your email box at the time I enter it with my broker myself, you need to subscribe to my free newsletter.

My newsletter will be free for the next three years (until beginning of 2018) then I will start collecting a fee.

October 2014 TD account results

 

January 2014 premiums: $156.10 (1.55%)
February 2014 premiums: $139.26 (1.38%)
March 2014 premiums: $746.62 (7.41%)
April 2014 premiums: $421.63 (4.19%)
May 2014 premiums: $803.32 (7.98%)
June 2014 premiums: $230.21 (2.29%)
July 2014 premiums: $4,602.44 (45.69%)
August 2014 premiums: -$172.58 (-1.71%)
September 2014 premiums: -$14,399.60 (-142.96%)
October 2014 premiums: -$100.49 (-1.00%)
   
January 2014 dividends: $25.87 (0.26%)
February 2014 dividends: $167.02 (1.66%)
March 2014 dividends: $68.77 (0.68%)
April 2014 dividends: $25.91 (0.26%)
May 2014 dividends: $168.51 (1.67%)
June 2014 dividends: $68.81 (0.68%)
July 2014 dividends: $25.96 (0.26%)
August 2014 dividends: $150.49 (1.49%)
September 2014 dividends: $68.86 (0.68%)
October 2014 dividends: $26.00 (0.26%)
   
Total 2014 income: -$4,996.67 (-49.60%)
2014 unrealized premiums: 2,065.49 (20.51%)
   
Account Equity: $18,703.84 (7.93%)
Account Net-Liq: $14,143.82 (-9.08%)
December 2013 balance: $10,072.25

You can see my dividend and options income on My Trades & Income page.

What about you? How was your October 2014 and the entire year so far? I hope better than mine! Post a link to your website or write down your results to encourage other investors!

Have a great November 2014!!
 
 




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Posted by Martin November 12, 2014
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Learning options – debit spreads with AAPL

Learning options - debit spreads with AAPL

As I continue learning options as a tool to make more money than just with dividend investing I moved into reviewing debit spreads.

If you follow my blog, you know that I do not prefer debit trades much. With debit trades, you pay up front for the trade and then you have to hope for the stock to move your direction and enough magnitude to overcome time decay in order to make money.

If that doesn’t happen, you lose.

For example, if you buy calls, the stock must move up in your direction. It also must move fast and strong enough. If it doesn’t move up and it goes sideways, you lose money. If it moves up, but slowly, you lose money. Why? The time decay will destroy the option.

The same goes with put options.

With credit trades, time is on your side. Unlike debit trades, your profit is limited, but your loss is unlimited. The debit trade limits your loss and makes your profit unlimited, but the probability of profit is very low.

Credit spreads can help you with limiting your loss. But when I heard about debit spreads I originally rejected them, because I wasn’t in favor of paying up front for a trade. Unlike debit spreads, with credit spread you receive premium right away, but then the stock must stay below (for calls) or above (for puts) your strike in order to keep that premium. But the trade is not directional. As long as the price stays below or above your strikes, it doesn’t matter, what the stock does. It can go sideways, up, or down. As long as it stays below or above your strike, you will make money at expiration.

So what is the difference between a credit spread and debit spread?

Besides I didn’t like paying the premium I realized an interesting and huge difference between the trades.

Here is an example.

I will use AAPL to demonstrate the difference.

A debit spread against AAPL which at this writing is trading at $111.25 a share

Debit Spread

If I decide to buy a debit spread, it would look like this:

BTO 1 AAPL Dec 2014 120 Call
STO 1 AAPL Dec 2014 125 Call

@ 0.24 LIMIT GTC (debit)

Max loss: $24
Max. Gain: $476
Margin requirements: $33.50

This will be a bullish trade and I will start making money anytime the stock moves above the current price. Whenever the stock moves above $111.39 a share I will make 0.05 a contract. Of course, in order to make some real money, the stock would have to move up more than that, but theoretically the trade will become positive even if the stock goes slowly up. If you buy calls out right, you will be losing money.

With this trade, you make a full profit of $476 (1983.33%) per contract when the stock goes above $140 a share. If the stock goes above 125 strike, you will make $256 profit (1066.67%).

Looks cool so far, right?

Credit spread

In order to create a same bullish credit spread (a synthetic trade), you would have to sell put spread (bull put spread). But for the sake of this example, we will use a call credit spread which will be bearish:

STO 1 AAPL Dec 2014 120 Call
BTO 1 AAPL Dec 2014 125 Call

@ 0.24 LIMIT GTC (credit)

Max loss: $476
Max. Gain: $24 (5.04%)
Margin requirements: $486.50

Can you see the difference? If not, let me put both trades next to each other. See the table below:

  Debit Spread Credit Spread
Max. Loss $24.00 $476.00
Max. Gain $476.00 (1983.33%) $24.00 (5.05%)
Margin $33.50 $486.50

I hope now the difference is visible very well, isn’t it?

For this reason I decided to give it a try and open a debit spread against AAPL. I will risk $24 to make $256 if the stock gets above 125 strike. Literally my risk to reward ratio is 1:10 (I risk 1 to make 10) while with credit spread I would risk 10 to make 1.

As I am not sure yet how this trade would proceed in different situations, the best way to learn for me is on a live trade. And since I will only risk $24 I think I can afford this learning on the go trade.

I placed the order right now and I will watch this trade carefully and report how that trade goes.

Happy trading!
 
 




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