Hello Investors,
Today in class we added a couple of 1×2 call spreads against stock positions we own (CCJ and SNAP). These structures allow us to profit more from upside moves. And in the event that the stocks fall, the small debit cost is the risk which is a comfortable low risk amount overall.
We own 130 shares of CCJ. We have 1 covered call currently. Adding this 1×2 call spread allows us to benefit from more upside in the stock. However, it does add some risk if the stock were to go too high because we are 70 shares naked overall. The details are as follows:
Buy to open: CCJ Dec 20th (monthly) 65.00 strike call (ratio of 1)
Sell to open: CCJ Dec 20th (monthly) 75.00 strike call (ratio of 2)
Debit: 0.79
Probable risk = 0.79 or $79.00 per spread
Max reward = 9.21 or $921.00 per spread
Breakeven price on the upside = 84.21 meaning that above this stock price we are “naked” 70 shares and have unlimited risk on those shares
We own 100 shares of SNAP. We have added 1×2 call spread so we are fully “covered” overall.
Buy to open: SNAP Dec 20th (monthly) 13.00 strike call (ratio of 1)
Sell to open: SNAP Dec 20th (monthly) 16.00 strike call (ratio of 2)
Debit: 0.18
Probable risk = 0.18 or $18.00 per spread
Max reward = 2.82 or $282.00 per spread
Have a great week!