Dan Passarelli is an author and the founder of Market Taker Mentoring LLC, the home of personalized, one-on-one options education.
SLB March 90-95 Bull Call Spread
Prices at the pump got you down? Maybe you’re on the wrong side of that trade. SLB has been on an upward trajectory since August of last year. And being able to capitalize on higher gas prices should continue to help that strength.
Bull call spreads have two components: a long call and a short call with a higher strike in the same expiration month. The long call provides bullish exposure. The credit from the short call offsets the cost of the long call, making the entire transaction cheaper. This has a few very important consequences.
For one, the percentage returns might end up being significantly better with the spread depending on how the stock plays out. If the stock is up at the short strike price at expiration, this strategy will significantly outperform simply owning a call. But if a very dynamic move higher occurs, owning a call beats owning the spread. On a steady riser like SLB, the spread should provide better profits in the event of a rise up to, but not through the $95 strike.
If the stock moves adversely (i.e., lower), the spread is emphatically better than the outright long call — there is less at risk with the lower debit. The spread also hedges time decay and volatility risk, making it a smarter play overall.
On Friday, the SLB March 90 Calls closed at $3.20; and the SLB March 95 Calls closed at $1.28. Schlumberger was trading at $90.37.
Dan Passarelli of MarketTaker.com writes the Market Taker Edge options newsletter. Dan has more than 17 years’ experience in the options industry as a market maker, Options Institute instructor and author of “Trading Option Greeks.”