Updated: Aug 23
Hello fellow trader, today I want to share an option trade I made on British Petroleum Plc (BP) on Monday the 15th of May 2023. I made 48% return in 16 days only on this trade. Below you find attached a video from my YouTube Channel where I give you a visual sneak peek into the trade.
I started by analyzing the stock chart and the underlying security trend over the last few months. From these analysis, I believed that BP could experience a slightly bearish trend in the short term and decided to bet on the stock going down. In these market conditions, options were the best tool to place the trade because of the flexibility to benefit from a multitude of different scenarios limiting your risk exposure.
Trading a Bearish Vertical Spread Using Calls
I decided to sell a bearish Vertical Spread which would allow me to take advantage of two different scenarios. First, I could make a profit with the underlying security trading downwards. Second, I could profit from the underlying security trading in a range and earn daily with the passage of time.
I went on to create a credit strategy called Bear Call Spread (Example). Basically, I combined options together to come up with the particular risk profile displayed in the risk graph below.
This strategy gave me an initial credit of $535 - which is also the strategy maximum profit - because the options sold have a higher price than the options purchased. I sold 5 contracts of the $36 calls expiring on the 16th of June 2023 and purchased 5 contracts of the $39 calls expiring on the same day.
The amount of money at stake in this position was $965 (maximum loss), this makes a risk/reward ratio of 55%, which is the maximum potential return on this trade. The call options building the position had 32 days of remaining life. This was in my opinion enough time to get into profit considering the bearish outlook on this stock in the short term.
I managed to build a position with some upwards protection. There is an upside breakeven at $37.07 with the stock trading around $36 at the moment I initiated the strategy. In other words, I can still be in a good spot and make a profit even with the underlying security trading up $1.
Earn from Time Decay and a Directional Move
In the following days, I was quite comfortable into the trade as the stock was trading in a narrow range between $35.50 and $36.50. At this point, I do not have to take any action rather than just keep monitoring the position a few minutes a day to see where I stand. I started accumulating roughly $6 a day just thanks to the passage of time.
From this point onwards, the underlying starts moving downwards, and this directional move helps the trade. On Wednesday the 31st of May 2023, I decided to exit the strategy collecting a sweet $465 profit due to the combined effect in my favor of the directional move of the stock and the favorable effect of time decay on my options.
Hope you found this trade interesting!
I’ll see you in the next release of the options trading diary.