Free Option Trade: October 07, 2009

I got this option trade idea from a very smart member. His observation was that POT was channeling and that it would be a good set up for an income strategy.

The only problem was that earnings are after expiration which is in 10 days.

Earnings could move the stock but it also keeps the volatility of the options high and that means high premium.  There is also a dividend to be paid on the 15th, which is one day before expiration. A dividend will lower the price of the stock by the amount of the dividend which in this case is 10 cents.

His idea was doing a butterfly option strategy. I decided to do a calendar because it is easier to adjust and share it here.

Free Option Trade

Buy 1 Nov 90 Call and Sell 1 Oct 90 Call. This trade cost me $315. My breakevens are at 86.14 and 94.40.

I feel this trade will work. But it will have to be held close to expiration. 

If POT gets outside the breakevens, exit the trade. or if you are experienced enough, add another calendar on the side of the brreakout.  If POT stays around 90, stay in as long as you can.

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  1. Don Yoshikawa on October 7, 2009 at 12:37 pm

    Are you sure this is correc? You can’t buy and sell a spead with identical legs. Your essentially cancelling each other out. Also based on the fact you paid $315 makes me think this is a mistake. Right now nov 90 call to buy is 5.40 and to sell is 5.20 which would only be a 20 cent difference.

    Pot is a very volatile stock and can move $5 in a couple of days. I would think the upside would be more positive than it going to the downside. It has alrady had a lot of bad news built in so any good news and it will shoot up.

    • Genius on October 7, 2009 at 2:37 pm

      My bad.
      Sell the Oct 90 Call and buy the Nov 90 Call.

  2. Lawrence Ita on October 7, 2009 at 12:47 pm

    I dont understand how earnings are after expiration which is in 10 days. November options on POT expire in 43 days, not 10 days.

    Also the order: “Buy 1 Nov 90 Call and Sell 1 Nov 90 Call” cannot produce any profit since it buys and sells the identical option.

    Please clarify

    • Genius on October 7, 2009 at 2:37 pm

      Sorry. There was a type in the trade which I have now fixed. It should be Sell the Oct 90 Call and But the Nov 90 Call

  3. Dick on October 7, 2009 at 1:52 pm

    That trade should cost you brokerage and your rate of return is negative. If my figuring is correct. But the risk is low……

    • Genius on October 7, 2009 at 2:36 pm

      Actually there was a type. The trade is Sell the Oct 90 but the Nov 90 Calls.

  4. Don Yoshikawa on October 7, 2009 at 3:35 pm

    The cost of the trade is $315. How do you calculate the max profit? If it gets near expiration w/o it going over 90 you collect most of the Oct premium and you would sell the Nov call which would have gone down in price which would be an unknown at this time. My understanding of a calender spread is the Oct call will drop in value faster than the Nov call. Not sure how you got your break even points.

  5. toby on October 9, 2009 at 11:04 am

    I am totally confused.It seems the correction of the typo is the SAME as the typo, ie sale the OCT 90 Call and buy the Nov 90 Call.
    Also since you paid $315, what exactly has to happen before you make a profit on this trade?

    As a new follower, please help! thanks, toby copeland

  6. Genius on October 12, 2009 at 12:31 pm

    I followed up this post with another on Calendar Spreads trying to explain how they work in more detail. The max profit is calculated by the trading software. I am sure you can do it by hand but it is too easy to let the computer do it. I never did too well in math anyway.

  7. Doug Fosbury on October 15, 2009 at 6:44 pm

    I see that POT reached 94.96 for a high today altho it came back below your suggested limit of 94.40. Should we exit tomorow?

  8. Kapinak P on October 16, 2009 at 11:53 am

    What is the trading software you use to calculate that? Please let me know i am very interested.

  9. Genius on October 16, 2009 at 1:31 pm

    The software used to calculate the breakevens was my brokers trading software. You should be able to use any broker’s trading platform to determine breakevens on a Calendar Spread.

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