By: Tom Gentile
on July 8th, 2022
When I go live on w webinar, write, or create a video that involves discussion on the market it usually involves using the SPY as the security that represents the market.
The SPY is showing some bullishness. The pivot low that happened on the SPY this past week is a higher low than the pivot low that happened on it June 16, 17 and 20.
We know the market can just as easily swing right around and resume its bearish downtrend and take out these pivot lows, but we are going to highlight a bullish Money Calendar (MC) setup and therefore a bullish option trade situation.
Should the market bounce continue, and this pattern play out as the past history suggests it could, here is a scenario that could take advantage of a higher price move in the security that has the MC pattern.
Or this article it will be Costco Wholesale Corporation, (NASDAQ: COST)
Option Scenario: Call Credit Spread
Here again is a situation where the pricing on the options is too expensive for a straight long call option so we will highlight a way to hedge a long call. This will create call debit spread instead by selling to open a call on the same order ticket, it’s just that the sold to open option will be of the same month expiry, but at a different strike price.
The way to realize max profitability is for COST to be trading above the sold strike in the debit spread at expiration.
The option gets exercised at the sold strike and then the account can assign the stock at the bought strike. Basically, the account would be selling the stock at the sold strike and buying it at the lower bought to open strike making the difference in the strikes offset by the debit up front to open the trade.
This is called exercise and assignment (or assignment and exercise) and should be done automatically with your broker. Check with your broker how this works with their firm and if not done automatically you may have to be on the phone with them at expiration to make sure it executes as it should.
In getting a fill on a spread we don’t need to specify specific prices for each option leg in the trade. We don’t care what price the bought to Open strike or the Sold to Open strikes get filled at just so long as when they are matched up on the order ticket the cost to do so does not exceed the limit price you set.
We looked at pricing to sell to open a put credit spread, but the numbers aren’t working out where we can get enough of a premium to give us the ROI potential per day we want so the Call Debit Spread is the consideration we would have you discuss with your broker.
App: Toms Option Tools
Market Insight articles may show images of lists of stocks meeting a variety of options parameters like Unusual Call and or Put activity or Expensive IV found on my app Toms Option Tools.
Other times I will have other charts may work to amplify my educational points.
Those options data lists, however, can be found on my app Tom’s Option Tools. Use your device to search up and download this app and get free access to the Morning Reports section of the app.
Other parts of the app are available at a premium subscription rate, but the Morning Reports Lists are yours free.
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