The Best Option for Trading – The Call Spread
There are a lot of spread trading strategies to choose from however only a few exist that really favour the individual trader with a powerful strategy. One the best trading strategies you should employ is the Call Spread.
The call spread is a cost effective method to place on a directional trade. It permits you to get into the game without it costing you an arm and a leg in comparison to buying stocks and shares. A Call Spread also has a premium collection component to it, so when you correctly place it if the stock market stays still and does NOT fall you can still make a return on your money. This displays the true versatility of the Call Spread and in turn displays why it is one of the best spread trading strategies to use.
There are a lot of ways to place call spreads but it's extremely important to put one on the correct way. Below is an example of a Call Spread so you can understand how it works in more detail:
Call Spread Example
September 2015: Stock ABC @ $50. You believe the stock has potential to rise.
You place a 45-50 Call Spread
Buy 45 Call
Sell 50 Call
You always want to sell the ATM (At The Money) option to collect the high, which in this case is the 50 Call.
A very important factor is how long you think the stock will take to make the move? A general rule of thumb of the stock market is this: The stock market likes to “take the stairs UP and the elevator DOWN”. It takes longer for moves to the upside as they tend to be slow and steady. However when a stock falls it tends to be much faster as investors and brokers are quick to respond to news that effects their holding.
So if you feel confident about a stock's worth and clearly believe it has upside then you want to allow your spread some time to before it climbs. So in this case you would want to buy a month or so out.
Buy 45 November Call
Sell 45 November Call
Here's an Insider Tip for you
Lock in your profits by selling your position off one week before it expires. This makes sure you don't get hammered in the volatile marketing movement of options expiration week. If you feel secure with your trade just buy the next months call spread. Make sure you short (or sell) the ATM (At The Money) Call to continue to maximize on the premium collection factor. This is called Rolling out your position.
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Watch a Video Tutorial on How To Trade Bull Call Spread Options Strategies