Boca_Bobby Basics

[boca_bobby]

CQB OPTION PLAY:

This one may be one of my most complicated options plays and may not be for everyone. I believe that we may be ready for something that will get our blood pumping. We have two plays wrapped into one. For those that like to keep it simple we have out vanilla play in which we simply by some CQB CALLS as such:

Buy July CQB $10/CALLS @ $0.55 (ASK)

But for those wanting to spread their wings I offer something a bit different. We don’t always have to simply buy a CALL or buy a PUT contract. We can also sell contracts to raise capital. We have seen on different occasions where I use used spreads to reduce the price of contracts wanted. What if I can show everyone a way to buy CALLS for $0 money out of your pocket? Anyone interested in taking a position in the market that costs them nothing? I am. Here is what I propose:

I will sell a PUT Spread way out there as not to worry us.

Sell CQB Jan 2011 $10/PUTS @ $3.10 (Bid Price)
Buy CQB Jan 2011 $5/PUTS @ $1.15 (Ask Price)

The Price of the spread is $1.95.
$3.10 - $1.15 = $1.95 per contract spread

Each contract is for 100 shares so we need to multiply the spread price by 100.
$1.95 X 100 = $195 per contract



With that said we have something else to watch for. This is the case where CQB may go down under $10 by Jan 2011. What is our downside risk? Well the most we can lose is the difference between the strike prices of the PUT SPREAD. Thus:

$10 - $5 = $5.00

We then need to multiply this by 100 because each contract is worth 100 shares. Therefore:

$5.00 X 100 = $500 per contract spread

So $500 per contract spread is our maximum risk in this play. So why take the risk for something so far out? Well we can use the $195 per contract spread to buy CALLS in August! The $10 CALLS are going for $1.15 each. But again, each contract is for 100 shares so we need to multiply:

$1.15 X 100 = $115 per contract



So in essence, we sell contracts to buy other contracts. If we always remember that we are trading contracts, we never have to worry about whether or not we need to buy shares, sell shares, remove shares from our portfolios, etc.