Many people are afraid of a bear call. They view it as risky as if the call are assigned.
To me, this is the same risk as a bull put except that if the put is assigned, the theoretical maximum loss is when the stock is zero.
But the key is the risk control. If you have a plan, a bull put is the same as a bear call.
In this case, I am ready to adjust the bear call if it goes against me. The risk is if I am not vigilant and failed to follow my plan.
CAT has been stagnant for almost a month. After a good earning results, the shares actually went down. It is taking a rest.
I am betting that it will stay stagnant or slightly bearish for the next 4 weeks. I like the stock very much longer term but believe it is taking a rest.
Trade:
STO Nov 80 Call = 1.52
BTO Nov 75 Call = .32
Credit = 1.2
Maximum Loss for Trade = 3.8
It is a very good return on risk for the trade.
PE: Maximum return of full credit for 1.2 minus commissions
SE: This is somewhat contrarian trade. I am bullish on CAT but short term bearish. If there is any news or drivers that suddenly send the stock up, I will adjust it to a bullish trade by:
- Adding a Long call making it a ratio spread or call calendar
- Take ownership of the stock to create a covered call.
The key point to watch is the BE point at 81.2. If it is getting close to this level fast or exceed this level, I will do the adjustment.
Also, this trade will make money when the stock is stagnant, bearish, slightly bearish, slightly bullish. I will need to adjust only if it is very bullish. It is a good probability trade.
Posts
I was wrong on CAT. On Friday, it turns bullish and triggered my SC.
ReplyDeleteI can add a LC to make it a back spread and it should work well.
But I decide not to continue with this trade and take a loss.
The position size is relatively small and no problem take a loss at all.