Spreads and Naked Calls
The married put strategy is a great way to get involved in a stock that you might want to purchase. It limits the risk and allows for an unlimited upside potential. Most of the time I use this strategy when I know I am going to be in the stock for up to 3 months. I have specific criteria for these stocks which I will cover on another post. There are other times where I want to buy a stock for a shorter term move, 1 to 3 weeks. These setups also have a specific criteria as well.
The way I like to play shorter term plays are the following. If the stock is very expensive I will usually buy a call debit spread. This is a limited risk strategy and a limited reward strategy.
This week I purchased a call debit spread on DKS and MRK.
On January 19 I purchased the March 120/125 Call spread on DKS for 2.58. My risk is limited to what I paid (2.58) or 258.00 dollars and I have until March 17 for this trade to materialize. Below is the chart
The green arrow shows the date I got in and the green horizontal line is the approximate price the stock was trading at when I executed the order. The reason I chose this stock to go long was that it had just made a new 52 week high and had pulled back to support. I took advantage of this pullback and decided to enter. I plan on being in this trade for about 1 week and hope to capture at least 35 to 50 percent of my risk on this trade.
The other call debit spread I did was on MRK. I purchased the April 110/115 call debit spread for 2.18, so my risk is limited to 218.00. Below is the chart
This stock is similar to DKS as it also recently made a new 52 week high and had pulled back to support as well. The green arrow shows the date I got in and the green horizontal line shows the approximate price.
Another way to get involved in a stock safely is to buy a naked call. This setup is very similar as the married put wherein there is limited risk but unlimited reward. I like to do these trades on lower priced stocks where the calls are not to expensive.
Today I purchased a the 37 Mar call on CAG for 1.46. My risk is limited to 146.00 per contract. Below is the chart.
This stock also recently made a new 52 week high and has pulled back to support. I expect the trend to continue but will look to exit the trade in 1 to 2 weeks.
These are great trades where you can get involved in a stock and only risk a small percentage of your account. I am all about trading safely and not allowing for large amounts of risk on my account.
There is more detail into the exact setups and criteria I use to enter the shorter term swings and also the longer term stock plays. In the near future I plan on doing a post on the specifics of these trade setups.
0 Comments