A strategy idea for options trading investors.
Ken Trester’s Plays of the Week
Two Credit Spreads – BMC, CLX
A credit spread involves writing (selling to open) an option and purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or leg, of the spread trade that you sell gives you a cash credit to your trading account. The option you buy limits your risk and lowers your margin requirement for the trade.
In a credit spread trade, you collect more money on the leg you write than you spend on the leg you buy, so you are getting paid to enter the trade! For maximum profits, you want both options involved in the spread to expire out-of-the-money. But regardless of what happens to the options, the money you receive for opening the position is yours to keep.
BMC Software (NASDAQ: BMC)
Put Credit Spread to Open — Sell the BMC Aug 50 Put and buy the BMC Aug 45 Put for a spread credit of 30 cents or higher.
BMC has been in a solid uptrend since last September. Unlike many stocks and indexes during the recent correction, at no time was it in danger of falling below its 200-day moving average. It recently made a double bottom near its 50-day moving average and has moved higher from there. That double bottom at about $51.50 now serves as support.
Underlying Stock: BMC
Current Stock Price: $55.56
Trade Type: Put credit spread
This position generates a 6% return on margin (36% annualized) for a seven-week holding period. Your maximum risk is $470 per contract.
Making the Trade: Use a spread order to Sell to Open the BMC Aug 50 Put, and Buy to Open the BMC Aug 45 Put, for a spread credit of 30 cents or higher.
A put credit spread is a bullish position in which you want the stock price to stay above the upper strike price of the spread. Use an auto-stop order to close this position if BMC trades below $49.50 prior to August options expiration and you do not want to buy the stock. If you do not close the position and the BMC Aug 50 Put expires in the money you will be obligated to buy 100 shares of the stock at $50 per share for each credit spread contract you open.
Find more option analysis and trading ideas at Options Trading Strategies.
Put Credit Spread to Open — Sell the Clorox (NYSE: CLX) Aug 65 Put and buy the CLX Aug 60 Put for a spread credit of 35 cents or higher.
CLX is a “slow mover” stock that generally is an ideal candidate on which to write options. It recently retreated from the top of a trading range down to its 200-day moving average, but has rallied from that point. Its 200-day moving average as well as a recently formed double bottom, both in the $66.50 area, now provide support.
Here is the information you need to know to open the Clorox put credit spread:
Underlying Stock: CLX
Current Stock Price: $68.10
Trade Type: Put credit spread
This position generates a 7% return on margin (42% annualized) for a seven-week holding period. Your maximum risk is $465 per contract.
Making the Trade: Use a spread order to Sell to Open the CLX Aug 65 Put, and Buy to Open the CLX Aug 60 Put, for a spread credit of 35 cents or higher.
Use an auto-stop order to close this position if CLX trades below $64.50 prior to August options expiration and you do not want to buy the stock. If you do not close the position and the CLX Aug 65 Put expires in the money you will be obligated to buy 100 shares of the stock at $65 per share for each credit spread contract you open.
Action Taken on Current Positions: Diamonds Trust (NYSE: DIA), SPDR S&P Retail ETF (NYSE: XRT)
The Diamonds Trust (DIA) Jul 124-127 Call credit spread and the SPDR S&P Retail ETF (XRT) Jul 54-58 Call credit spread were closed Friday when the stocks traded above their stop prices.
Ken Trester’s Fast Options
Action to Take on Current Positions: Take-Two Interactive Software (NASDAQ: TTWO), Starwood Hotels (NYSE: HOT)
Close the Take-Two Interactive Software (TTWO) Sep 14 Put and the Starwood Hotels (HOT) Aug 50 Put. The stocks closed above their stop prices Friday.
Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.
