One type of spread you’ll often see professional traders use is the ratio spread, or the ratio backspread, to be more specific.
This type of trade essentially has too much risk involved to be used by most casual traders.
A standard backspread consists of buying an option near the money (call or put) and selling two options in the same expiration at a higher (call) or lower (put) strike.
A size option trader apparently agrees with me and purchased a massive call spread expiring in January of 2019. With EA stock at $132, the trader bought roughly 11,000 January 135 calls while selling the 155 calls for a total debit of $7. That means the trader spent over $8 million on the trade. Clearly, he or she if very bullish on EA over the next half year.
With $7 paid in premium, the breakeven point for the spread is at $142. That same premium is the max loss for the trade. Max gain is at a point anywhere above $155 at expiration, slightly higher than where the stock was before the earnings miss. Max gain is $13, or $14.3 million in dollar terms… that’s also a return of 186%.
I think this a decent trade to emulate. EA may not recover for a few months, but has several potential catalysts which could send the stock higher down the road. The price of the spread is not cheap, but 186% return potential and six months of time is reasonable for the cost.
If you like the trade but want to reduce your costs somewhat, you can narrow the spread. For instance, the January 135-145 call spread only costs $4 but lowers your max gain to $6. You can also pick an expiration which is closer, but I think EA may need the extra time to recover.
Options Trading Basics - Enjoy a Free Week to Active Day Trader
Activedaytrader.com/free
Jonathan Rose of Active day trader teaches options trading basics in the lesson on the difference between calls and puts and how they relate to intrinsic and extrinsic value.
Jonathan sharing options trading basics through a stock option example using callls and puts. Jonathan Rose also shows an options trading example using the example of delta, which helps option traders who want to learn how trading delta can help there stock option trading performance.
This options trading tutorial was produced by Jonathan Rose of Active Day Trader. Enjoy.
*** Disclaimer *** StockFetcher.com does not endorse or suggest any of the securities which are returned in any of the searches or filters. They are provided purely for informational and research purposes. StockFetcher.com does not recommend particular securities. StockFetcher.com, Vestyl Software, L.L.C. and involved content providers shall not be liable for any errors or delays in the content, or for any actions taken based on the content.