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Using Both Call and Put Spreads to Create a Low Cost, Limited Risk Bullish Position

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The following is an example alert published yesterday on Steve's OptionSmith newsletter

I’ve always shied away from Apple (NASDAQ:AAPL) but I did get sucked in at the 20% decline near the $545 level and established a bull leaning calendar spread. I’m now delving in deeper as Apple is the market and I its prey. May the best tool win.

I originally hoped to escape the clutches on a plan that a move above $540 this morning would provide the opportunity for a simply roll of the calendar spread. No such luck. So now with this thing rotting down below $530, I have to perform some pretzel logic. I have a nice article rounding out my feelings and outlook on the company coming up on the main MV site soon. But this is how we are juking and jiving here in the OptionSmith sandbox.

Rolling down and out the current bull call calendar spread:

-Bought to close 5 November $555 calls (AAPL121117C0055500) at $0.25 a contract
-Sold to close 5 December $555 calls (AAPL121222C0055500) at $11.40 a contract

This is a $75 loss. But we had closed out half of the position yesterday, so still have a $1,050 profit. Now let’s get sucked in further with some fresh positions that have a 99.2% of producing a profit. I lie. But I like the action and I like our chances of using our experience and management of risk/reward to produce reasonable returns over the next few weeks.

It must be Christmas because suddenly there are weekly options throughout the remainder of the year. Shop, customize, profit, adjust and of course return for more pain.

The New Call Side.
-Bought to open 10 December $545 calls (AAPL121214C0054500) at $13.20 a contract
-Sold to open 10 November $545 calls (AAPL121130C0054500) at $8.45 a contract

This is a $4.75 net debit for the spread. In selling a shorter term call against the longer term we have a positive theta (all else being equal the position will collect $58 a day I time decay) and a rally in stock price will likely lead to a decline in implied volatility which will also be beneficial.

Put Side
Just to give us some additional premium while volatility is high and sentiment so low, I’m establishing a bull put spread for a credit.
-Sold to open 15 December $515 puts (AAPL121207P0051500) a $11.10 a contract
-Bought to open 15 December $500 puts (AAPL121207P0050000) at $6.90 a contract
This is a $4.20 net credit for the spread.

I’ll talk though this position a bit more tomorrow and may slip some weekly butter just to make sure nothing too bad can happen. But I think we are good for now.

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POSITION:  Position in AAPL options.