Monday, May 7, 2012

Paper trade - $AAPL diagonal spread

want to control 100 shares of Apple but dont have $56000 bucks? only have $15k to commit? look at a "diagonal spread" instead if you have a long term bullish thesis like most seem to have on aaple:

Buy the Jan2014 500strike call for about $134 ($13400)
Sell the June2012 600 strike call for about $10 ($1000)
total cost about $12400

this diagonal spread is exactly like a stock covered call. if you owned 100shares and sold the 600short call for monthly premium, but you commit only 1/3rd the amount of capital. your breakeven on just the short call is 610..but the 500strike call has gained from here to jun opex trademonster shows your upside breakeven at you make money up to 771 since the 500call has such a huge headstart on is gaining while the 600short call is losing.

If stock is under 600 at june opex you keep that $1000 in premium, lowers the cost basis of the long call and you sell another short call for July.

So for 1/3rd the capital you are getting the benefit of a stock covered call for income generation and you still have upside potential. trademonster shows that at 610 at June opex your profit is $2800 (your 500call gains, while the 600short call is at break even)