How to Trade a Bear Call Spread: Apache Corporation (APA)

09/17/2009 12:01 am EST

Focus: OPTIONS

This bear call spread (a credit spread) showed up this morning on the exclusive ONN Idea Generating Platform (IGP). Apache Corporation (APA) shares may be attracting technical breakout traders lately as it makes 11-month highs above $90. With oil prices struggling around the $70-per-barrel mark, however, driven by supply concerns, a look at neutral to bearish strategies might be warranted. This credit spread trade offers a nice risk/reward opportunity.

APA Credit Spread Trade Details

APA is currently trading at $91.14.

Credit Spread/Bear Call Spread

  • Sell the October 95 call (out-of-the-money) for $2.20 per contract.
  • Buy the October 100 call (out-of-the-money) for $1.00 per contract.
  • Net credit of $1.20 per spread

Profit/Loss Details

The maximum profit for this spread is the credit collected ($1.20 per spread) minus commissions. The investor achieves this at October expiration (October 16) assuming the stock is trading below the 95 strike, at which point both calls expire worthless and the premium is pocketed without the trader paying exit commissions. It is important to remember with this and all credit spreads that profit is limited to this credit collected at the outset of the trade.

This credit spread's maximum risk is the difference between the short and long call strike ($5.00) minus the credit collected ($1.20), or $3.80 (plus commissions). The return on risk for this trade is approximately 32%.

Break even for this trade is the strike of the lower call (95) plus the premium collected, or $96.20. APA would have to rally 5.5% before even hitting this break-even level.

By the Staff at ONN.tv

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