Let’s face it, some of these publicly traded stocks are down right expensive. Because of this, many traders can not – or choose not to – trade stocks over the $100 per share level.
Are there other “options” available that require less capital? As a matter of fact there is: Stock Options. So what are stock options? Here is a brief description from Investopedia:
Now on to a real world use of the stock option and for this I will discuss an option trade I have on in ISRG (Intuitive Surgical). Here is a recent Hourly chart:
In constructing a trade, one of the key tasks is to identify some clear support and resistance areas that could come into play. As you can see in the chart above, price is currently arm wrestling the $550 level and there is some support down at the $525 level. So in my review yesterday for the trade, I determined that I would put the following trade on using May options:
- Sell the 535/525 Put Spread for $7
- Buy the 550/565 Call Spread for $7
This trade was done for a small credit once filled. The highlights for this trade are as follows:
- The cost of short put spread pays for the upside call spread
- The gain for the call spread is capped at $15
- The downside risk is capped at $10
- The margin use is significantly less with a short put spread when compared to being short just a put – especially on a stock with a $550 per share price tag.
I chose the May expiration due to the fact that the April options expire next Friday, thus leaving just a few trading days left. This is not a trade for everyone as it does require some margin use.
4/18/2012 Update: A lot of active work in this trade now that the earnings event has occured and the stock is currently tading above the $590 range. Here is what I have done up to this point:
Bought back the Short 535 Put on 4/13/2012 ($8 profit) on 4/13/2012
This left a Long 525 Put and Long 550/565 Call Spread
On 4/18/2012 I bought back the Short 565 Call at 29.81 and Sold the 595 Call for $16. I also sold the 525 Put for $3 (glad to get some value from it here).
On 4/18/2012 I sold the 550 Call at 46.70 and bought the 580 Call for 21.5 to take out $25.5 in profit.
I now own the May 580/595 Call Spread