Do you remember I did a Diagonal Bull Call Spread back on 7/18/19? Well, I’m completely out of this position.
A Diagonal Bull Call Spread is a position like a Covered Call. Only you don’t buy the stock, you buy a Long Call Option to cover a Short Call Option you sold. Instead of buying the stock, you buy the right to buy the stock. I know it can get confusing but this is just one of the many moves you can do with options, and what makes this game so interesting.
On 7/18 I sold a 10 contract Call on Micron (MU). This is the Short position. I sold the MU 1/17/20 $50 Call. I received a premium of $3.50 for $3500. Along with this Call I bought a 10 contract MU 6/19/20 $45 Call, this is the Long position. For buying this Call I paid $7.50 for $7500. With a Diagonal Bull Call Spread the Call you buy is further out in time, and it has a lower Strike Price. I sold the 1/17/20 $50 Call and I bought the 6/19/20 $45 Call. This way if I have to deliver the stock at $50 on 1/17/20 I own the right to buy the stock (I have to deliver) at $45.
You can read about me getting into this position at Results Week Ending 7/19/19. If you go to this page the Diagonal Bull Call Spread is explained at the bottom, after my weekly report.
Let’s see how this position played out.
After getting into the position the stock moved up. While it was up, the Call I bought as part of the Diagonal Bull Call Spread was worth more money. I bought the Call for $7500 and on 9/16/19 the value of the Long Call was up to $10,000. At that time I decided to bail out of the Long Call and lock in the $3000 profit. You can read about this at Filled on My Micron “Sell to Close.”
At this point I now own a Naked Short Call. This is a dangerous position because this contract says I have to deliver the stock at $50. When sold the Long Call which was covering my Short Call the stock was at $49.83. I still had 4 months before I would have to deliver and I felt confident the stock would go down before that and I would either buy the stock to cover the Short Call or do a “Buy to Close” to get out. Well, today the stock is down big on an earnings report and outlook. I originally sold this Short Call for $3.50 or $3500, and today the premium is down to $2.50 or $2500. Since there is still 4 months until expiration I decided to do a “Buy to Close” and get completely out of my Diagonal Bull Call Spread. I sold for $3500 and just did the “Buy to Close” for $2500, profiting $1000.
After being in this position for 2 months I am out! I made $3000 on the Long Call and just made $1000 on the Short Call, for a total profit of $4000.
Now remember, with a Diagonal Bull Call Spread you never buy the stock. You cover the Short Call with the Long Call. So, the only money I spent while in this position is the money I bought the Long Call for, which is the $7500. I invested $7500, was in the position for 2 months, and made a profit of $4000. That’s a 53% return in 2 months!
7/18/19 – Sell to Open 10 MU 1/17/20 $50.00 C @ $3.50 (+$3500)
9/27/19 – Buy to Close 10 MU 1/17/20 $50.00 C @ $2.50 (-$2500)
Profit +$1000
I know if you’re trying to learn how to trade options this can get confusing. Don’t get intimidated! Keep studying! In time it will all come together.
If you have any questions on this position send me an email.
Now I must get back to my backyard. I have a big Oktoberfest tomorrow. It’s gonna be a beautiful day in NY. If you’re in the area let me know I’ll send you my address.
Steve
The Options Coach