The market has been on the up trend in the first few days of the new year 2009. Believe that the market will be range bound or slightly on the downside over the next few weeks. Some of the financial stocks and credit card issuers still having relatively high implied volatility. So decided to setup vertical spread (Bear CALL spread) on some of those stocks. If my decision is wrong and these stocks price continue to go upward, will need to cut lost at break-even point or with some loses.Choosing spreads where the potential gain vs potential lost is at a ratio of 1:5 (or 1:4) minimum. E.g. for BAC the amount collected from selling the vertical spread is $0.30. The distance between the strike prices BAC-CALL-Jan-15 and BAC-CALL-Jan-16 is $1.00. Max potential profit is the $0.30 premium collected upfront. Max potential lost is $0.70 (i.e. $1.00 minus $0.30). The reward/risk ratio is 42.8% (i.e. $0.30 divided by $0.70) which is consider very good. Any reward/risk ratio of 20% (or 25%) and above is consider good.
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Setup (Sell-To-Open) Bear CALL spreads for MS, C, BAC and COF.Fund A net value is $92,062.
Cash on hand is $103,220.
The entire setup currently at a lost of -$3,030.
100% target profit will be achieved for these vertical spreads if at the expiry Friday, the Stock price do not cross over the nearest CALL option strike price of the vertical spreads.
POSITION MANAGEMENT STRATEGY
Stop Lost : to close position if the lost is equal to OR the lost at Expiry Friday will be greater than the premium collected upfront.
Collect Profit : to close position when the profit is at 80% or more of the max potential profit (i.e. the premium collected upfront).
OPEN POSITIONS
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