Stock Symbol: [private_monthly]ADBE[/private_monthly]
Option Strategy: Call Back Spread
Max Risk: $592 (close at $28 on 11/19/10)
Max Gain: Unlimited
Profit Range: $29.48 +
Max Risk if stock closes at or under $27 by Nov expiration: $192
Break even on Oct 15th: $27.17
Break Even at Expiration: $29.48
Reasoning: We feel that the street overreacted this stock's recent earnings report. We expect that [private_monthly]Adobe - ADBE[/private_monthly] will soon make it's way back to the $30 level. This strategy is geared to take advantage of a significant upward move in a stock, yet greatly limits our losses in the event that we're wrong and the stock moves still lower from its current level.
Trade Details:
[private_monthly]
Buy 8 ADBE NOV 28 CALL @ $0.85 $680.00
Sell -4 ADBE NOV 27 CALL @ $1.22 ($488.00) Credit
Requirements:
Cost/Proceeds $192.00 - Net Debit
Option Requirement $400.00
Total Requirements $592.00
Estimated Commission $15.00
[/private_monthly]
Chart:
[private_monthly]
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ARE YOU BUYING 8 AND SELLING 4….????
Yes. This is a CALL RATIO BACKSPREAD. A call ratio backspread is a delta-neutral (non-directional risk) trade, which can yield unlimited reward as the stock rises. This is a bullish strategy that involves simultaneously selling a number of lower strike call options and buying a greater number of higher strike call options of the same underlying stock and expiration in a ratio, usually of 2 or 3 to one. This trade has unlimited upside, with limited risk that is executed when a trader thinks that the underlying stock will experience substantial near-term upside movement.
Compared with just buying calls, the call ratio backspread offers the same unlimited reward potential with a lower breakeven and less cost.
A call ratio backspread is made up of short calls and long calls in a ratio such that you sell less calls than you buy in a ratio of .67 or less (2/3 = .67). For example, a 1×2 call ratio backspread consists of 1 short call and 2 long calls, which gives a ratio of .50