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OlmsteadOptions

Trading Weekly Options: Capitalizing on a Move in QCOM with a Backspread Trade

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The backspread trade is used to take advantage of a substantial move in the price of a stock or ETF. This trade is composed of more long options than short options, with the strike prices selected so that the cost of the trade is small and even possibly provides a credit.

 

In order for the backspread trade to be successful, the expiration date of the options must allow sufficient time for the expected price move in the underlying stock or ETF to occur. It is possible to use weekly options for the backspread provided that the price move occurs within the brief lifetime of the options. A possible application of a backspread with weekly options is in anticipation of a special announcement or report that might produce a substantial price move.

 

On September 12, Apple, Inc (AAPL) is expected to announce the details of its new iPhone 5. A company that may benefit from this announcement is Qualcomm, Inc. This makes a weekly backspread trade on QCOM look particularly attractive, since QCOM options offer more leverage than the corresponding AAPL weekly options.

 

Let's consider a possible backspread trade with QCOM call options that will expire on September 14.

 

Trade: Buy 3 September 62.5 weekly calls (expiration 9/14) at $.75 per share and sell 1 September 60 weekly call (expiration 9/14) at $2.60 per share.

 

Credit = $35 [(2.60 X 100) - (.75 X 300) = 35]

 

Maximum risk = $215

 

If the price of QCOM reaches $64.25 before the weekly options expire on September 14, the backspread trade can be closed for a profit of $135. That represents a 63% return relative to the maximum risk on the trade.

 

The maximum loss occurs if the price of QCOM closes at exactly $62.5 as the call options expire on 9/14. If QCOM happens to close below $60 on 9/14, then all of the options expire worthless and the original credit of $35 becomes a profit.

 

Disclosure: Olmstead Options owns monthly options in QCOM that expire Sept. 21.

 

Dr. Olmstead can be found at http://www.olmsteadoptions.com, an on-line options trading site, centered around options education material and option trading strategies he’s developed. He is Professor of Applied Mathematics at Northwestern University, author of the popular and highly-praised options book, Options for the Beginner and Beyond (2006) and former chief strategist for The Options Professor on-line newsletter, distributed by Zacks.com and Forbes.com.

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