Today we discussed 1×2 spreads as “trades” against existing investments. We own 30 shares of CCJ. We added a 1×2 call spread and a 1×2 put spread against those shares. That builds a structure that gives us profit potential if the stock goes up or down. However, if the stock stays flat, then we could lose a little. Most importantly, the big risk is to a gigantic upside move. We are long 30 shares of stock, adding the 1×2 call spread leaves us “naked” or “uncovered” by 70 shares. So, we are likely to feed our stock position and own more shares on an upside breakout. The new additions are as follows:
Buy to open: CCJ July 19th (monthly) 55.00 strike call (ratio of 1)
Sell to open: CCJ July 19th (monthly) 60.00 strike call (ratio of 2)
Debit: 0.56
Likely risk = 0.56 or $56.00 debit
Max reward = 4.44 or $444.00
Max risk = being “naked” 70 shares and losses mount above 69/share
Buy to open: CCJ July 19th (monthly) 55.00 strike put (ratio of 1)
Sell to open: CCJ July 19th (monthly) 50.00 strike put (ratio of 2)
Debit: 1.00
Likely risk = 1.00 or $100.00 debit
Max reward = 4.00 or $400.00
Max risk = owning another 100 shares at a 46/share cost basis
Have a great week!