I bought the Apr.9 CAT 202.5 call for 20.20. It is now up about 35% and I want to sell a call to create a debit spread. The stock is currently selling for 229. My question is which strike should I sell? According to the Chuck Hughes option spread calculator if I sell the 227.50 strike call for 8.67 I realize a 116.8% return. If I sell the 212.5 call my return is 432%. The 205 call is at 25.07 which is more than my original investment, so basically the narrower the spread width the greater the return, according to the calculator. Am I understanding this correctly? Is there any downside to selling the call closest to my existing long call?
Legging in to call debit spread
- Thread starter 65sohc
- Start date
You are understanding it correctly but if you think the run up in CAT is over why not just sell your original call and book your profits?
Do you have a price target you're expecting for April 9? For example is you are thinking it will be at 235. You could sell 2 of the 235 calls and buy 1 of the 275s and now you have a butterfly on.
Do you have a price target you're expecting for April 9? For example is you are thinking it will be at 235. You could sell 2 of the 235 calls and buy 1 of the 275s and now you have a butterfly on.
CAT price: 229.50
Selling 205 call = 25.10 (0.60 gain from current price)(205+25.10=230.10)
Selling 212.50 call = 18.30 (1.30 gain from current price)(212.50+18.30=230.80)
Selling 227.50 call = 8.70 (6.70 gain from current price)(227.50+8.70=236.20)
***Selling the 205 call or 212.50 call doesn't get much more profit than selling your current position.
***Selling the 227.50 call has the potential to increase profit by 6.70 ($670) as long as CAT price is above 227.50 at expiration.
***I wouldn't pay attention to percentages with options. Calculate the dollars.
Selling 205 call = 25.10 (0.60 gain from current price)(205+25.10=230.10)
Selling 212.50 call = 18.30 (1.30 gain from current price)(212.50+18.30=230.80)
Selling 227.50 call = 8.70 (6.70 gain from current price)(227.50+8.70=236.20)
***Selling the 205 call or 212.50 call doesn't get much more profit than selling your current position.
***Selling the 227.50 call has the potential to increase profit by 6.70 ($670) as long as CAT price is above 227.50 at expiration.
***I wouldn't pay attention to percentages with options. Calculate the dollars.
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Just be prepared to exercise your $205 call if you ever get assigned. Since you are selling ITM calls, as long as the stock doesn't drop below the current price, you are going to get assigned which means you are going to be short the stock at whatever strike that you sold the call at. IMO a better way is sell OTM options so that way you can avoid assignments and still hold onto the profitable long option provided that the stock keeps climbing at the same speed or faster.
All in all, do NOT let your long $205 call expire worthless! This is the key when trading American option spreads. Either sell it when it still has value or exercise it to offset any assignments.
Interesting that you’d want to cap your potential profits on the biggest up day CAT has seen in along time. Massive green bar with pronounced volume accompanying it. If I were you, I’d hold your call and see what Monday brings. If history rhymes then CAT has a little upward momentum left then consolidation nation commences.
I’d sell your 9 APR 21 202.5 call for around $28 for a nice return on debit. If you’re still interested in CAT then metamorphosize the caterpillars into a 16 APR 21 220/230/240 natural butterfly @ 1.95 mid risk
CAT tends to meander in a relatively tight range after every breakout. Also looking at the 210/220/240 231p @ 5.51 risk
I’d sell your 9 APR 21 202.5 call for around $28 for a nice return on debit. If you’re still interested in CAT then metamorphosize the caterpillars into a 16 APR 21 220/230/240 natural butterfly @ 1.95 mid risk
CAT tends to meander in a relatively tight range after every breakout. Also looking at the 210/220/240 231p @ 5.51 risk
For some reason I keep reading this post and it’s not making a lotta sense in my microcephalic brain
I am assuming he will be selling a call with a closer expiration date and the stock will keep climbing. If the stock is going back down to at least below the call with the highest strike 227.50, then he doesn't need to worry about the assignment but then he needs to worry about the value of his currently DITM long call cuz it will be dropping also.