Collecting Cash From a Wide Spread

Jon Lewis

Sometimes it pays to go wide.

We just closed a bull put spread trade on Amazon [stock_market_widget type=”inline” symbol=”AMZN” template=”basic” color=”default” refresh_frequency=”0″] for $474 net after trading commissions in just 8 days in my Smart Options Income service.

The spread was 5 points wide, because that was the increment for AMZN option strikes at the Oct. 20 expiration.

Five points may seem a bit wide to some, if only because the margin required increases quite a bit from our average trade.

Though a 5-point spread is somewhat rare, this trade is no different than any other in terms of the parameters underlying its selection.

The minimum credit received was $1, which represents a return of 25% on margin ($1 credit on $4 margin). This is the same as a $0.20 credit on a 1-point spread or $0.50 on a 2.5-point spread.

In fact, the wider width often gives you an advantage because you’re trading fewer spreads, which translates into lower commissions.

Using the Credit Spread Calculator and assuming a $25,000 portfolio and $1 per contract in fees, you’d have a max profit of $294 with $1/5-point spread, $288 for the $0.50/2.5-point spread and $270 for the $0.20/1-point spread.

This advantage would of course increase if you had to buy the spread back. And we did.

Amazon stock price moved up sharply on no news and we were able to buy back our spread for $0.24 and pocket a nice $474 after broker commissions.

Sometimes it pays to go wide when selling spread options.

About The Author

Meet Jon Lewis, With over 20 years of real experience, teaching AND trading, Jon will help you learn to use options profitably and safely in portfolios of any size.

His advantage, and now yours, is using simple, often overlooked spread options strategies which generate consistent income without significant risk.