Profiting in Any Type of Market---Call options

In this informative article we focus on strategies that really help us raise the profit potential and protect profits for ETF and ETF option purchases. In today's quick markets you will need to protect profits for profitable ETF and ETF option purchases:

1) Take profits on part of your profitable ETF or ETF option positions.

2) Sell a choice to create a spread on profitable ETF or ETF option positions

We covered taking partial profits on profitable ETF and ETF option positions in Chapter 2 - Trade Management Guidelines. Now let's study selling options to produce spreads on profitable ETF and ETF option positions. Selling options to create spreads not only helps protect profits but has got the added benefit of increasing the net income potential of existing trades. Related Posts About call options. Let's examine an actual trade example to help you us understand why important concept.

In 2006 the China ETF was at a GPS Major Trend System price up trend. My brokerage confirmation below implies that in December 2006 I purchased 10 from the China ETF (FXI) January 90-Strike call options symbol YOFAW in increments with an average expense of 17.44. These options expire in 13 months. I then sold 10 with the China ETF (FXI) January 120-Strike call options symbol YOFAD at 8.00 points on May 11th. The sale of the 120-Strike call options made a bullish option spread that increases the profit potential from the 90-Strike call options purchase plus provides down side protection in case the China ETF increases in price. Although this is a longer term trade this spread may be closed in the market to take profits anytime before option expiration. As noted previously I normally will need profits with a spread trade in the event the spread reaches about 90% of the company's maximum profit potential. Seeking more info linked to options trading.

The Spread Analysis below displays the profit potential for buying the China ETF January 90-Strike call option for 17.44 points and selling the January 120-Strike demand 8.0 points. The Analysis displays potential profit recent results for various price changes for that China ETF at option expiration from the 10% increase to your 10% reduction in price. The China ETF was trading at 115.90 if the spread was created. The cost of this spread is 9.44 points or $944 which is calculated by subtracting the 8.0 points I received in the sale of the 120-Strike call through the 17.44 cost from the 90-Strike call purchase. The maximum risk on this trade is the price of $944.

The Spread Analysis reveals that if your China ETF price remains flat at 115.90 at option expiration a 174% return will be realized (circled). A 10% boost in price for your China ETF to 127.49 makes a 217.8% return along with a 10% rise in price to 104.31 makes a 51.6% return (circled). The maximum profit potential of 217.8% just for this spread is reached when the China ETF closes at or higher 120 at option expiration which may be the strike price from the short call.

I purchased the China ETF 90-Strike get in touch with December. The price in the underlying China Fund ETF continued to maneuver up in price following your purchase and by May 11th the 90-Strike call purchase had a 9.70 point open trade profit when I sold the 120-Strike call to generate the spread.

When I sold the 120-Strike call the China ETF was trading at 115.90. The 120-Strike call, therefore, was an out-of-the-money call because the strike price was greater than the current price from the ETF. Out-of-the-money calls incorporate only time value with no intrinsic value. When you sell an out-of-the-money call the full value in the premium in this example 8.00 points becomes all profit at option expiration as options lose all time value at expiration. So the sale of the 120-Strike out-of-the-money call enhances the profit potential from the 90-Strike call purchase by 8.00 points regardless with the subsequent price movement with the China ETF.

Increased Profit Potential by 82% and Reduced Risk

On May 11th the current 90-Strike call purchase a 9.70 point open trade profit and so the sale from the 120-Strike call increased the net income potential in the call purchase by 82% (8.00 points/9.70 points = 82%). In addition on the increased profit potential the sale from the 10-Strike call also reduced risk by giving downside protection for that 90-Strike call purchase if your price of the China ETF declined. Creating spreads with the existing option purchases enhances the profit potential and reduces the risk in the option purchase. This provides one with the best overall risk/reward profiles in comparison to any other strategy.

Note: In this example we used a bullish option spread. The same benefits of creating a bullish option spread would also apply to bearish options spreads.