I wish to share this new options strategy that I am trying out, which I thought has a good chance of success and relatively good returns. This is actually a BULL CALL Spread strategy where you simultaneously buy and sell a CALL option at different strike prices on the same expiration date.
Read more about the BULL CALL Spread strategy here:
How Does Bull CALL Spread Work? | CALL Debit Spread Explained For Newbies
To stand a higher chance of winning, I choose the strike prices that I think are almost unreachable within the time of the contract.
I will give you an example of this trade that I have initiated on 22 March 24 (Friday)
Strategy: ITM BULL CALL Spread (IBCS)
Option Legs: BUY USD 800 CALL, SELL USD 820 CALL
Expiration Date: 26 April 24 (34-day contract duration)
Premium Paid (Max Loss): USD1680 x 10 contracts = USD 16.8k
Max Gain: USD20,000 – USD 16,800 = USD 3,200
This means that if Nvidia’s share price closes above USD820 on 26 April 24, both contracts expire in the money (ITM) and I will get my max gain of USD3.2k for the 10 contracts that I have opened.
That also means upon expiration, I will win if
Scenario 1: Nvidia trades higher than Friday’s closing price of USD 942 and closes above this price.
Scenario 2: Nvidia stays sideways for the next 34 days and closes at USD 942.
Scenario 3: Nvidia goes through a 12.8% correction and closes at USD 821.
Nvidia is the number 1 stock front leading the whole AI revolution and it should continue its uptrend unless a black swan event happens, e.g. another pandemic. Scenario 3 is my safety net should sh*t hits the fan.
I have a 12.8% share price drop buffer to protect against the downside and still get the maximum gain from the trade. It is somewhat similar to the SOP strategy when I will profit if the trend goes in my favour, stays sideways or, have a slight drop.
My Options Trading Strategy For 2023 | Introducing SOP Options Trading Strategy
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Comparing With SOP Strategy
This IBCS is less capital-intensive than the SOP strategy. To get a return of USD 3.2k, you will need to sell PUT at a strike price of USD890 and hope it expires worthless, which means you will need Nvidia’s share price to close above USD 890 on 26 August (less probable than closing above USD 820) and USD 89,000 as the cash set aside to sell your CASH Secured PUT.
The disadvantage of this strategy is when the worst-case scenario happens, the IBCS strategy will have a max loss of all the invested capital of USD 16.8k, whereas, for the SOP strategy, all the invested capital of USD 89k would be used to buy 100 shares at USD890. So, it is not totally gone unless Nvidia declares bankruptcy and the shares become worthless.
Concluding Thoughts
Inferring from the delta value, the chances of Nvidia closing below USD 820 is around 14%, so the chance of success is around 86%. Getting 3.2k out of 16.8k represents a 19% return in a month, which is not a bad return for a trade that has a good chance of success.
If you think that this is a good idea, you can try it out with a small strike price range, say $5 range, so that your invested capital is lower. Or you can try out with 1 contract instead of 10 contracts like me. One of the advantages of using spreads is to use a lower capital to achieve a good return on fundamentally strong companies that would be more challenging to do single-leg options due to their high share prices.
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