OPENING: XLU JULY 20TH 47 LONG/MAY 18TH 51 SHORT CALL
... for a 3.02/contract debit.
This is a "properly" set up split month Poor Man's Covered Call where the credit received for the short exceeds the extrinsic in the long and has a neutral to bullish assumption. It's neutral because price can stay right here, and I can reduce cost basis further by rolling the short call out in time and/or it's bullish, because it will also benefit from movement of the underlying toward the short call strike.
Metrics:
Max Profit on Setup*: .82/contract
Max Loss on Setup: 3.02/contract
Break Even on Setup: 50.02
Price/Spread Width Ratio: 75.5%**
Profit Target: 20% of debit paid or .60/contract
* -- These metrics are only good at setup. When you roll the short call, the potential max profit and max loss metrics change because you've received additional credit and therefore reduce cost basis further.
** -- I generally like to see less than 75%, but this is in that neighborhood.
Notes: Previously, most of my posts have involved directionally neutral setups like short strangles/straddles and iron condors/flies. These setups don't represent a change in tack over my traditionally agnostic approach to the market, but rather another tool in the tool box for those who want to take a longer-term, directional position in underlyings without ponying up for a full on covered call and/or want to reduce cost basis "up front" before exercising the long for shares.
This is a "properly" set up split month Poor Man's Covered Call where the credit received for the short exceeds the extrinsic in the long and has a neutral to bullish assumption. It's neutral because price can stay right here, and I can reduce cost basis further by rolling the short call out in time and/or it's bullish, because it will also benefit from movement of the underlying toward the short call strike.
Metrics:
Max Profit on Setup*: .82/contract
Max Loss on Setup: 3.02/contract
Break Even on Setup: 50.02
Price/Spread Width Ratio: 75.5%**
Profit Target: 20% of debit paid or .60/contract
* -- These metrics are only good at setup. When you roll the short call, the potential max profit and max loss metrics change because you've received additional credit and therefore reduce cost basis further.
** -- I generally like to see less than 75%, but this is in that neighborhood.
Notes: Previously, most of my posts have involved directionally neutral setups like short strangles/straddles and iron condors/flies. These setups don't represent a change in tack over my traditionally agnostic approach to the market, but rather another tool in the tool box for those who want to take a longer-term, directional position in underlyings without ponying up for a full on covered call and/or want to reduce cost basis "up front" before exercising the long for shares.
Trade active:
Rolling the May 51 short call to June on 50% loss of value for a .24/contract credit; scratch at 2.78. Take profit remains the same (.60/contract), so I'll take it off if it hits 2.78 + .60 = 3.38/contract.
Trade closed manually:
Taking profit here for a 3.15/contract credit. 3.15 - 2.78 = .40 net profit/contract (14.4% ROC). I'll look to potentially reset on weakness.