Did my first option Bear Call spread on Royal Bank of Canada stock last week, and want to see if I understand it fully.
RY (Royal Bank) is the underlying stock. I am bearish on it, and so used this spread to limit my risk. I sold a call option with a strike price $54 and received a premium of $3.05 per share. I sold one contact and that is equal to 100 shares, so I received $305 for selling this call.
I then bought a call option at a higher strike price of $60 for a cost of $0.91, or $91. So my max profit is $305- $91= $215. I will receive the full amount if in 6 weeks, on the third Friday of Oct, RY is trading below $54.
Is this correct so far?
My break even point is the lower strike ($54) plus the premium received ($2.15) so break even is $56.15.
Instead of calculating Return on Investment, I changed it to Return on RIsk, as my total risk is the difference between the two strike prices ($60 - $54)= $6 minus the premium received ($2.15) as I keep this regardless. So total risk is $3.85, or $385.
Max risk is $385
Max return is $215
Return on Risk = $215/$385 = 55.84%
That sounds great, but is the reality that my Risk to reward ratio is very poor? I am risking more than my possible return. If this is so, why do people do spreads?
I only did one contract, as its my first spread. Will see how it works out in 6 weeks!!
Thanks for any input.
RY (Royal Bank) is the underlying stock. I am bearish on it, and so used this spread to limit my risk. I sold a call option with a strike price $54 and received a premium of $3.05 per share. I sold one contact and that is equal to 100 shares, so I received $305 for selling this call.
I then bought a call option at a higher strike price of $60 for a cost of $0.91, or $91. So my max profit is $305- $91= $215. I will receive the full amount if in 6 weeks, on the third Friday of Oct, RY is trading below $54.
Is this correct so far?
My break even point is the lower strike ($54) plus the premium received ($2.15) so break even is $56.15.
Instead of calculating Return on Investment, I changed it to Return on RIsk, as my total risk is the difference between the two strike prices ($60 - $54)= $6 minus the premium received ($2.15) as I keep this regardless. So total risk is $3.85, or $385.
Max risk is $385
Max return is $215
Return on Risk = $215/$385 = 55.84%
That sounds great, but is the reality that my Risk to reward ratio is very poor? I am risking more than my possible return. If this is so, why do people do spreads?
I only did one contract, as its my first spread. Will see how it works out in 6 weeks!!
Thanks for any input.
