Stock / Symbol: [private_monthly]Verifone Systems / PAY [/private_monthly]
Price at trade post: $41.81
Option Strategy: calendar call spread
Max Risk: $480
Max Reward: $256 or 53% by Mar 2011 expiration
Profit Range: $39.89 - $52.86 by Mar 2011 expiration
Max Profit at: $45 (on Mar 18th)
Reasoning: This company has good fundamentals and bounced nicely off of its 50 day average today. Break even on the trade is at $39.89, or about 4.50% lower than where the stock is currently. If the stock is trading under $45 by March expiration, we'll have taken in a 20% uncalled return and will then look to sell the April 45 calls.
Trade Details:
[private_monthly]
Buy 1 PAY Jan12 45 Call @ $6.00 for $600.00
Sell -1 PAY Mar11 45 Call @ $1.20 for ($120.00)
for a net debit of $4.80 per contract
Cost/Proceeds: $480.00
Option Requirement: $0.00
Total Requirements: $480.00
Estimated Commission: $12.95
[/private_monthly]
Chart:
[private_monthly]
[/private_monthly]
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Hi Mike I am fairly new to options . I understand the dollar amount at risk, but what I have trouble with is this..Is the risk in the downside or to the upside in the stock price with PAY Thanks
Don, as this trade generated a debit to the account of $480 when we put it on, that is that maximum amount we can lose. On a calendar spread, you can lose money if the stock moves to extremes in either direction. Our risk graph does not show us where the stock would need to be in order to experience the full loss by March expiration but it does show that if the stock drops 25% from where we bought it, down to $31.35 by March 18th, we’ll have lost $323. The risk graph also shows that if the stock moves up 34.5% from here, closing at $56.25 on March 18th, we’ll have lost $79.20. So, while we could lose money with extreme moves in either direction, we’re worse off if the stock moves dramatically to the downside.
Thanks Mike.. I appreciate your answer