Last Nights Credit Spreads

In last nights credit spread presentation I discussed two potential set-up's. Normally we have a bullish trade and a bearish trade depending on everyones outlook on the market. Here are the candidates we looked at.

Bull Put Spread on the Semiconductor Index (SOX.X)
If the SOX gives a nice bounce off support, we talked about entering a trade as follows

Buy Oct 440 put
Sell Oct 445 put

Bear Call Spread on CAT
Yesterday was a confirmation of a Desceding Triangle with new resistance at $45

Buy Oct 70 call
Sell Oct 65 call

If you still feel there is a good risk reward in these trades, fire away. CAT made a nice move this morning, but the SOX hasn't given us an entry signal yet. Keep an eye on it for a bounce.

Hi, again Jeff!
I looked at the BCS on CAT. The stock closed Friday at $62.72, crashing through support @65. The fall should continue for a bit as the Tuesday through Friday drops involved increasing negative volume.

The BCS reward/risk ratio today, Sunday, is about 1:5 ($0.20 reward per dollar risked)which is crummy (taken from the TOS setup).

I almost erased what is below when I remembered the discussion below is an uncovered call, so I guess I still don't realize why this is dangerous in the "real" world. As you know, I like selling stopped puts and this is, afterall, just the mirror case. And I remember that both you and Kelly were united last week telling me to do the bear call spread when I mentioned selling uncovered calls. I guess I simply don't believe the stock will gap so hard/fast as this is a dangerous thing. Selling the put seems to be just as dangerous. I probably would sit down for lunch with alligators... So, here's what I wrote and you can smack me down. Enjoy! ::::

Why not just sell the 65C strike ($1.00/$1.05) and simply put a stop on the option at, say, $1.20. At 10 contracts (forgetting trade cost) the initial position is $1000 credit. Max loss (forget gaps) is $200. This way, the reward/risk is 5:1, a 20X difference to the spread.

Exit: the next support is a one touch point @$60 followed by strong support at $57. Exit by $57.50, protect profit around the $60 mark.

Thanks for all! Enjoy the smack down!

Larry

What about your risk reward?

Risk: Unlinited
Reward: $1

Jeff, wasn't your R/R on the CAT trade 1:1?

BJ

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  • I am a professional trader and an instructor for Investools. I've had relations with the markets for 9 years. Born in Concord, CA, but reside in Saratoga Springs, Utah. Father of THREE, Husband of one.
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