Options Theory: Bull Call Spread Width Selection
November 4, 2022
Today’s video walks through smart ways to reduce risk when trading a bull call spread.
Notes
I have a NFLX 16 DEC 22 290/330 Bull Call Spread for $14.83. It is losing money now. From the chart it seems NFLX is in a bull retracement. It do not think that it is a good idea to exit the trade before NFLX breaks 200 SMA or 20 SMA. I do not have enough contracts to scale out. What would be a good strategy to manage the trade to reduce risk. How to play bullish on high price stocks with less risk than bull call spreads? I know you have recommended butterfly but I find it difficult to set target in butterfly trade. What time frame do you recommend for butterfly? Thanks a lot.
Long Dec $290/$330 bull call spread.
$40-wide vertical spread.
Paid $14.83 (Risk)
$25.17, Potential Reward
Rule of thumb on a bull call is to get a 25 net delta. Problem is when you do this on EXPENSIVE stocks, it’s a lot of risk.
What would be a good strategy to manage the trade to reduce risk
1) Make the bull call spread cheap enough at the beginning so you can simply risk what you paid or put in a stop under support and be losing an acceptable amount.
2) $40-wide bull call and you want to SHRINK the risk after the fact. You can narrow the spread width by rolling down the higher strike call.
Long $290 call
Short $330 call
Adjustment: Buy back the $330 call and sell a $320 call. You get a credit when you do this. That reduces your risk by the credit amount.
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