Markets are looking lower to us although higher risk entering new trades over weekend with health care bill looming, but wanted to give another bear option selling trade for time decay income. As long as the markets don’t gap over today’s high on Monday, we will maintain a bearish bias. Have a great weekend!
Below is daily/weekly chart of Applied Materials, Inc. (AMAT), $38.96.
Trade: We recommend selling 10 Apr $40/42 bear call spread ((28 Days to Expiration (DTE)) for around current mid-point of $.37/share.
Technical Setup: Retest and Failure daily and Climactic Sell Setup weekly chart.
Option Strategy: Bear Call Credit Spread (BCS). Defined risk strategy where you make maximum profit (net credit received) if the stock closes below the short call strike at expiration. We sell call strike price above resistance where the pattern suggests that the stock will not close above at expiry, and simultaneously purchase higher strike call than the one sold as a hedge and to reduce margin.
The return on investment (ROI) is the credit received divided by the maximum loss (i.e., width of strike prices less premium received). The break-even is the short strike price plus credit received (i.e., also your cost basis if assigned the stock).
Considered a mildly bearish strategy since we are not buying puts (or shorting stock) and just calling a short-term top in the pattern. Trade has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.
Max Gain: Credit received. Cost basis if assigned is $40.37 (3.6% Cushion).
Stop Loss: $40.12.
Happy trading! If you have any questions or comments, please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
All the best,
Greg Capra
Managing Director and Pristine Founder
Dan Gibby
Chief Options Strategist
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Twitter: @GregCapra
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