42% Profit On Our GOOG Call Spread

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Call spread: Thanks so much for joining us again here tonight on the video recap that we do here at the end of the day where we go over our opening and closing trades. Now, today is May 22nd, and we only had one opening trade and one closing trade for today, but they were both in big-name stocks, Netflix and then Google.

And I’m going to go over the Google trading alert first, the closing trade that we made there and talk about that before we get into Netflix and our calendar spread. For Google, what happened was that we entered this originally a 525, 530 debit call spread for June.

And we made this trade back at the end of April, so we’ve onto this thing for almost a month now, and it is a good testament to holding onto this 50-50 trade that we had originally made. When we made this trade back at the end of April, we were just trying to get some long exposure.

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And it took a while for this thing to show a profit and a significant one at that. And finally, today we were able to sell back to the market our 525, 530 call spread for a 370 credit and take in about $110 on each spread. It’s a nice $220 profit for this trade in Google.  And again, since it was originally a 50-50 bet, we want to get out of this trade now and not risk it through the rest of July.

But if you look at the chart here of Google, this was the actual day that we had originally bought the spread. It’s very close to the bottom of where the market was trading. And you’ll notice that just after that, Google went back into the money for our strikes, and then came back up and didn't show a profit, went back into the money for our strikes, and then just in the last couple of days, has finally started to move higher to show a profit.

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And the reason that I highlight this in particular because we have time tonight is because you don't know when you're going to get an opportunity to take profits and you just have to hold onto that trade. It is a 50-50 bet, but you just have to hold onto that trade, knowing that at least at some point between now and June expiration, we were going to get an opportunity to take some money off the table.

And since we got that opportunity now, we got that move that we were expecting, albeit late, we need to take this trade off the table and just move onto the next one. It’s not a high probability trade; it’s just a trade meant to keep us active. In that sense, we want to take the $220 and run with them.

Now, if we move on to just the opening trade that we made here today, it was just one trade, and that was on Netflix. Now, Netflix has had a pretty significant rally here recently off the bottom and has been one of the leaders in really the NASDAQ and the tech sector leading us higher. But I do think that Netflix is going to have a little bit of difficulty at least maintaining this move, and that's why I decided to do a calendar spread below the market or a put calendar spread in Netflix.

And we’ve gone over a lot of these recently because it’s just a small volatility time, so calendars are very, very easy and popular to trade. The setup on this one is that we’re trading just the 370 strikes, only focusing on one strike, not doing anything vertically as far as an attack like 525, 530, just doing the 370 strike puts. Now, what we do is we end up selling the front month option which is the June and buying the back month option which is the July. And that creates our calendar or horizontal spread that we’re trading.

And we only do this in low volatility because if volatility does increase and especially if the stock starts to sell off, we could see an increase in volatility. That increase in volatility is going to be better affected by being long the July options and being short the front month or June options which will decay faster. That’s the idea behind this.

Now, we did pay a hefty premium for this, and that’s only because this is a huge stock. It's very highly traded, very liquid, very high price point in 370, so we paid about 670 for this spread, that's why we only did one, just trying to keep our risk size small.

But you'll see here that this is a good trade and could start to make us money even if Netflix starts to move down from here slowly. 370 is an out of the money strike, so we did focus our attention a little bit out of money for Netflix, but even if we get a slight movement lower in the stock, we could make some money.

Alright, here’s a look at Netflix. And you can see that it's made a pretty significant move here in the last couple of weeks, a move that I don't think is sustainable at least at this rate. I believe that the stock is going to have a little bit of a tough time rallying from here, given that it’s had such a good move off of the base. Now that said, our strike is around 370 which is just slightly out of the money. And we’ve talked about this before.

We don't usually want to trade these things right at the money, we want to trade them slightly out of the money, be a little bit directional on our move. And we’ll see that implied volatility is down in the 16th percentile, so it’s very low for Netflix which is historically a pretty volatile stock and we could see implied volatility very easily get back up into the 30s and 40s which would double where it’s at from here and obviously help our position.

Now, if we go to the Analyze tab on our Thinkorswim platform here, you guys can see exactly what our spread looks like as long as my computer would help me out here. There we go. You know exactly what our spread looks like right now in Netflix. We have our spread down here below. We are short the June 370 puts and long the July 370 puts, so that’s the +1 and -1 that you see below.

Now, Netflix is trading just above 390 which is right about here on the actual analyze tab. And you’ll notice that this trade is already starting to make money right now. If everything stays the same and Netflix doesn't move, we’ll make a little bit of money at expiration. But the real sweet spot in this trade is right around 370.

That's where this profit loss diagram or the red line peaks out. But you'll notice that by paying a higher price in the debit for this calendar, we give ourselves a pretty wide range to make money by expiration. The range in which we can earn money by expiration is just a little bit south of 350 and actually around 395 or so.

We have a pretty big window of opportunity between now and June end to make money in Netflix. Ideally, we just want the stock to move a little bit lower. Anywhere between about 350 and 395 is ideal territory for us to make money going into expiration. If I head back to the charts, that's pretty much anywhere between here, 350 and about 395 which is just about here.

You can see that we’ve given ourselves pretty ample space for Netflix to continue lower which I do think it will. I believe that we'll get an opportunity at least at some point for this thing to be a little bit closer to around 380, possibly 370 or so, at which point we’ll close out the trade and sell it back to the market before June expiration.

That's the idea with the Netflix trade. Again, a little bit higher price point, but you also have a wider opportunity to make some money. As always, I hope you guys enjoy these videos. Please ask as many questions as you want right below this video. I’ll get back to all of those tonight or tomorrow before the open. And happy trading!

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.