Credit Spread Trade on NASDAQ Biotech Index (IBB)

11/03/2009 12:01 am EST

Focus: OPTIONS

This particular bearish-to-neutral credit spread on the iShares NASDAQ Biotechnology Index (IBB) offers a large credit (47% return on risk) and provides the potential opportunity to benefit from a pullback in the broad equity market. If a decline takes the IBB to support at $70, traders will be able to buy this spread back for a profit before December expiration.

IBB Credit Spread Trade Details

The IBB is currently trading at $74.09

Credit Spread/Bear Call Spread

  • Sell the December 75 call (out of the money) for $2.15 per contract
  • Buy the December 80 call (out of the money) for $0.55 per contract
  • Net credit of $1.60 per spread

Profit/Loss Details

Maximum Profit: $1.60 (the credit collected). This excludes commissions, though exit commissions will not be required if both calls expire worthless.

Maximum Risk: $3.40 (the difference between strikes minus the credit collected).

Break Even: $76.60 (the strike of the lower call plus the premium).

By the Staff at ONN.tv

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